Price of stock key to AAco’s value

On Monday, Queensland and Northern Territory cattle company, Australian Agricultural Company Limited (AAco), announced it would raise about $56.3 million via an equity raising to institutional investors.

The purpose of the equity raising is to allow AAco to pursue growth consistent with the company’s three year strategic plan, while maintaining target gearing levels of less than 40 per cent.

The three-year strategic plan, which started in 2010, is focused on transforming AAco from a pastoral company into a vertically integrated beef producer and value-added processor.

Existing shareholders will have an opportunity to take part in the raising also, with AAco flagging it will raise up to an additional $30 million through a share purchase plan.

AAco’s holdings include 6.7 million hectares of pastoral land in Queensland and the Northern Territory, with 577,144 cattle on 18 stations, two feedlots and two farms.

In March 2011, AAco purchased an additional 53,000 cattle from the Tipperary Group, which is owned by interests associated with Allan Myers and family, for a total cost of $26 million.

The AAco business is split into the Live Cattle Division and the Wholesale Division. The Live Cattle Division comprises the breeding and trading herds, while the Wholesale Division focuses on distributing beef to restaurants, wholesalers and supermarkets.

The meat processing section of the AAco supply chain is currently outsourced to facilities in south-east Queensland.

Of the $56.3 million equity initially raised, $31.4 million will be used to repay debt relating to the Tipperary acquisition (the additional $5 million was required to cover plant and equipment costs in the transaction) with the remainder of the proceeds applied to reduce debt in the near term and provide funding capacity to implement strategic initiatives.

The 39.6 million new AAco shares issued to institutional investors at $1.42/share will begin trading on the ASX on May 16.

Before the announcement the stock was trading at $1.55/share so this represents a slight stag profit on the table for the institutions.

From here, you’d expect the stock to trade back toward the $1.42 level where the capital was raised as the market deals with the influx of new stock.

This will prove an interesting decision for the existing shareholders who are offered the share purchase plan (also priced at $1.42/share).

With the share purchase plan being on a delayed time frame existing investors will have the opportunity to assess where the stock is at and whether they are better off purchasing new stock on the market, or participating in the share purchase plan that is priced at a modest 9 per cent discount to the current market.

There is no doubt investors will vote with their feet on this one, so the stock price will be the best indication of whether there is enough value in the AAco equity raising to keep shareholders on side.

For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.