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Why the Australian Agricultural Company Ltd share price just dropped 9% lower

Shares in the Australian Agricultural Company Ltd (ASX: AAC) – also known as AACo – opened 9% down to $1.10 on Wednesday, following the release of a market update forecasting weak results for FY2018.

The document is based on preliminary and unaudited results for the 12 months ending March 31 and provides a preview of the company’s full year results, to be released on May 23. Here are some key figures from the release:

  • Operating EBITDA of between $12 million and $16 million, 65% to 73% lower than 2017
  • Statutory EBITDA loss of between $30 million and $40 million, compared to a positive EBITDA of $133 million in 2017
  • Negative operating cash flow of between $38 million to $42 million, compared to a positive FY2017 operating cash flow of $29.3 million.

AACo also announced non-cash charges of around $60 million dollars due to an onerous contract provision and an impairment charge in relation to its Livingstone Beef processing facility.

AACo released a disappointing half-year result in November, as the transition from a livestock company to a branded beef business proved less profitable than expected. Now the company will partially backtrack from that transformation.

CEO Hugh Killen said the AACo has undertaken “a comprehensive operational review focused on diagnosing the current business model and identifying the changes that need to be made to improve shareholder returns”. The company is conducting a strategic review of the Livingston Beef asset, and will shorten the supply chain in the underperforming premium segment, retreating from the beef sale business back to the original cattle sale model. AACo will continue to sell branded beef in the luxury segment (i.e. wagyu beef).

Foolish takeaway

Vertical integration didn’t pay off for the Australian Agricultural Company and abandoning some of the least performing operations seems necessary, but I’m not confident they can make a quick turnaround with their high net debt and negative cash flow.

The share price grew 13% in the last month, possibly on speculation about a takeover from AACo’s main shareholder, investment company Tavistock Group. But these are just rumours, and based on the company’s current performance I wouldn’t recommend buying the stock.

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Motley Fool contributor Tommaso Autorino has no position in any of the 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 Scott Phillips.

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