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Why Wellard Ltd’s share price popped today

Shares in agribusiness Wellard Ltd (ASX: WLD) spiked 15.9% this morning on higher than average volume but have since fallen back and are currently changing hands for 24.5 cents, up 11.4% on Friday’s close. The reason for the rise is unclear given the company has not released any news today.

The latest announcement by the company was made last Thursday and it seems unlikely that it caused today’s spike. The subject of that release was an ongoing dispute between two major shareholders over director remuneration and board representation.

Despite today’s rise, Wellard’s shares are still down over 80% since the company listed in December last year. No wonder shareholders are squabbling!

Upon listing, Wellard forecast pro forma net profit after tax (NPAT) of $46.4 million in 2016, but the actual result was $14.8 million which explains the share’s plunge over the past year. The reasons given by management for this underperformance are twofold.

  1. Operational issues caused by two vessel breakdowns.
  2. High cattle prices in Australia combined with the inability to pass them onto customers causing margin compression.

Perhaps the greatest concern for investors is the company’s worsening debt position which stood at $171.6 million after cash at 30 June 2016. Notably, most of the $290 million raised in the IPO was used to repay existing shareholders.

Wellard is essentially a trader in livestock, sourcing it from places where there is an oversupply and selling it in countries where demand exceeds local production. Like listed cattle farmer Australian Agriculture Company Ltd (ASX: AAC), Wellard hopes to benefit from growing Asian demand for protein rich foods.

But as the company’s recent travails demonstrate, favourable long-term demand trends are just a small factor in successfully running an agribusiness.

In my view Wellard is a capital-intensive business subject to fluctuating commodity prices with a track record of execution that is far from perfect. It will be interesting to see if any news emerges to explain today’s price action.

Shareholders in Wellard have seen the value of their investment slashed by 80% in less than a year. The same thing could happen to holders of these 3 Rotten Shares so make sure you don't own any of them!

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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