Agricore United believes it is time to start looking at investment opportunities outside of grain handling to improve shareholder returns.
The company has focused on paying off debt incurred in rebuilding and rationalizing its grain handling network while coping with two years of widespread drought and the challenges of merging the two parent companies, United Grain Growers and Agricore.
But debt is now more manageable, better weather has returned and efficiencies from the merger are yielding benefits, said Brian Hayward, AU chief executive officer.
“For the first time since the merger, we believe the time is right to revisit our strategic plan and explore net growth opportunities,” Hayward said during a conference call with analysts and reporters, discussing the company’s second quarter results.
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The plan covers three areas, the first of which is investment in value-added processing.
“This could involve an expansion of our livestock division, or developing initiatives that involve some level of processing grains and oilseeds beyond their raw state, including investments in or with alternative energy businesses,” he said.
The investments could be in Canada or in another country.
The second target is to expand AU’s grain handling and crop services business to areas where it is not well represented.
The final goal is to expand financial services, including development of risk management programs for producers.
He said the timing of these moves will depend on markets and the changing political and regulatory framework.
Investments in processing would generate not only income from that venture, but would increase the company’s core grain handling business, Hayward said.
“In effect it generates markets for our own grain operation. Then we’ve got more of a certainty of market share, we’re less commodity driven and we reduce volatility.”
He said AU would work with its major shareholder, Archer Daniels Midland, if opportunity presented itself.
The financial target for these investments would be an 11 percent return on equity.
In the past, the company has focused on using its cash generating capacity to reduce its debt load and it won’t entirely abandon that track.
In May, the Dominion Bond Rating Service increased its rating on AU’s senior long-term debt and series A and B notes to BB, and the convertible unsecured subordinated debentures are B+.
AU also announced it intended to exercise its option to redeem convertible debentures by issuing shares. Conversion of debt to shares is expected to lead to interest savings of more than $9 million in 2007. The share issue will need regulatory approval and timing will depend on the trading value of the company’s shares.
AU also has large losses from previous years that it can carry forward to apply against profits in the future, reducing its taxable income.
