Unfortunately it has been yet another day of disappointment for Wellard Ltd (ASX: WLD) shareholders, six months to the day the company floated on the Australian Stock Exchange.
The live animal exporter's shares came out of a two-day trading halt with an immediate drop of over 15% at the market open. This was the result of the release of a disappointing trading update to the market revealing yet another full year profit downgrade.
The company announced that full year profit after tax is now likely to fall to between $23.5 and $30 million, compared to the full year guidance of $42.5 million given in its half-year results. At the lower end of its guidance it is almost 50% lower than its original prospectus forecast of $46.4 million.
It will come as little surprise to learn that the share price is trading almost 63% lower than it was when it listed back in December, making it one of the worst IPOs that I have seen in recent times.
The disappointing profit guidance comes despite Wellard being on target to ship a record 450,000 cattle during the full year. CEO Mauro Balzarini explained the reasons behind the disappointing full year forecast:
"Heavy out of season rain in northern Australia has meant the price we have paid for cattle has consistently been 80-100 cents per kilogram higher than the prior corresponding period. There has been strong customer resistance to those high prices and trading margins have been impacted as a result."
So despite the company being on target to ship a record number of cattle, forces outside its control are conspiring against it.
In my opinion this highlights just why shares of Wellard and industry peers such as Australian Agricultural Company Ltd (ASX: AAC), Select Harvests Limited (ASX: SHV), and Elders Ltd (ASX: ELD) are some of the more high-risk investments on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Admittedly, the sell-off in Wellard's shares does make them appear cheap on paper. If it delivers the lower end of its guidance the shares will be trading at just a touch over 10x earnings. But Wellard has stated that it expects margin pressure to continue in the short to medium term, which is likely to put even more pressure on earnings next year also.
Farmers across Australia are in the process of rebuilding their herds, which is reducing supply in the the short term. In the long-term the company should benefit as herd numbers rebuild, but it may take some time before this is noticeable on the company's bottom line.
If and when cattle supply does increase and prices come down it might be worthwhile revisiting the shares, but for now I would stay away and focus on companies with more control over their margins.
