This time last year, I stated that the company was achieving its objectives on domestic markets, while keeping its export strategy on the backburner for the time being. Those objectives were:
• to operate profitably,
• to gain market traction and reputation,
• to introduce marketing professionalism, and
• to increase respect from our grower shareholders.
At the time, we were raising capital, from both existing and new shareholders, to fund our vertical integration strategy involving the purchase of farms to underpin overall oyster supply. We had purchased one farm, here at Wagonga, and reached agreement on a second, in the Shoalhaven. However, I also stressed the company’s need and desire to purchase additional quantities of quality oysters from our grower suppliers to meet growing domestic demand.
A Busy, Productive Year
A great deal has happened in the intervening twelve months. In particular, following formal discussions and an extensive due diligence process, Roc Partners, pursuant to mandates it holds from major Australian investment and superannuation funds, agreed to invest $20 million in our business.
This decision was a tangible endorsement of the strategy which we had embarked on and the management team we had built. The arithmetic of Roc’s investment implied an increased value in the shares we had on issue. The scale of the investment meant that the implementation of our plans could be accelerated.
The Roc investment required approval from our shareholders, which occurred in April this year when around 84% of all shares of the company voted unanimously (in person or by proxy) in favour of it. An initial $15 million was transferred in May and management has since been extremely busy putting these funds to good use.
As you know, the company now owns seven farms – at Merimbula, two at Wagonga, Shoalhaven, Wallis Lake and two at Port Macquarie, with catching leases at Moruya and Bermagui, and two small, as yet undeveloped, leases at Port Stephens. We have 126 hectares of aquaculture leases, which is around 3 percent of total NSW lease areas.
We have also purchased a commercial property in Batemans Bay to house our processing facility and corporate office. Mark Allsopp, our CEO, will provide more detail in his presentation shortly.
I want to step back from the specifics and provide shareholders with the broader context – some of it you have heard or read before, some is new information.
First, we now have a new operating company for the business: AOC Private Pty Ltd. That is the company into which the two Roc managed funds have invested. Australia’s Oyster Coast Ltd received 5 million shares, valued at $5 million, in AOC Private in return for the transfer of its assets, operating business, and staff etc. With Roc’s $15 million so far, we thus have a 25% equity stake in AOC Private.
Because “Australia’s Oyster Coast” is the name which now has market recognition, we wish to change the name of AOC Private Pty Ltd to Australia’s Oyster Coast Pty Ltd. However, that name cannot be used unless the existing Australia’s Oyster Coast Ltd first changes its name. Hence the resolution on today’s agenda to change the company’s name to AOC (Oyster Investments) Ltd. It’s a bit convoluted to get your mind around, but it’s just a procedural change.
In future, the annual accounts of AOC (Oyster Investments) Ltd will be much simplified, showing just the financial return from its 25% equity in the operating company and a few associated costs, such as audit and interest. We will continue to hold annual meetings to allow shareholders to hear from and question management and the board; this forms part of our accountability obligations and will obviously include details about the operating company as well as the holding company in which your shares are held. And I will continue to write shareholder letters from time to time to keep shareholders updated on major developments.
Second, we are now nearly six months into the new structure and arrangements. I can only express appreciation for the approach and contribution of our new partners from Roc. They are professional, enthusiastic and constructive in a way which bodes well for the future of our collective endeavours. Roc principal Mike Lukin is here today and will be happy to speak to shareholders after the meeting, or indeed to answer any questions from shareholders during the meeting.
Third, as most shareholders will be aware, we received some media coverage in recent weeks, some of which has been critical of the company. Given the poorly informed nature of several comments and assertions made, I want to set the record straight and will do so shortly.
2017-18 Annual Accounts
But first, let me draw out the highlights from the 2017-18 annual accounts, which were sent to shareholders along with the notice of meeting. As usual, the receipt and consideration of the accounts is an agenda item for this meeting.
The company’s P&L showed a profit after tax of nearly $1.65 million. This is after an allowance for tax of $625,000. It compares with a net loss after tax the prior year of $241,000.
The result is substantially explained by the value uplift which accrued when the company’s business was sold to AOC Private as part of the Roc transaction. Note 4 to the accounts (p 13) discloses that the gain on the sale of the business was $2.144 million – this figure was after a number of costs the company incurred as part of the transaction were deducted.
The net profit before tax was $2.271 million. The company’s operating profit from oyster sales was the difference between the gain on the sale of the business and the net profit before tax: $127,000.
Last year, I forecast that the company would achieve an operating profit in 2017-18 as sales volumes continued to increase. The $127,000 is that figure, a considerable turnaround from the prior year’s loss. Moreover, it covered just the period from July to mid-May, after which the business was conducted by the new company, AOC Private. I would also note that there was considerable management input to the Roc transaction deliberations, without which oyster sales would have been even higher than they were.
During 2017-18 the company’s sales revenue (Note 4, p 13) was $6.2 million, up from $1.97 million the prior year. This was achieved from the marketing of 550,000 doz oysters, up from 200,000 doz the prior year, and just 20,000 in 2015-16. Our marketing success has been impressive, from a standing start in 2015.
Share Value: $1.25
Directors assess the value of the company currently at $5 million, reflecting the value ascribed by Roc in the transaction context. Divide this by the 4 million (approximately) shares in Australia’s Oyster Coast Ltd, and the value per share is now $1.25.
For a shareholder who made an initial investment of $10,000 in the company, that investment benefitted first from the 3 for 10 bonus issue early last year (which was a reward to those shareholders who invested at the riskiest time of the company’s existence), and second from the increased share value associated with the Roc transaction. An initial $1 share thus now has an implied value of around $1.60 ($1 x 1.3 x 1.25).
I am delighted that our shareholders have seen a significant increase in the value of their investment – and of course I hope there will be more to come in the years ahead, both increased share value and the payment of dividends.
Grower Investment Plan to Continue
As far as grower shareholders are concerned, I also hope that you see yourselves as much as a shareholder of the business as a supplier to it. As a supplier, you will continue to receive market prices, plus the significant added benefits of farm collection, bag supply, regular payment and product feedback. As a shareholder, you will also benefit from increasing share value and dividends as and when they occur.
There is no question that our company’s operation has contributed to increased farm gate prices for oysters, as we have brought a new marketing sophistication to the industry and helped the renaissance of oysters, especially Sydney Rock Oysters, on restaurant menus. All growers have benefitted from this of course, not just our grower shareholders.
As part of our desire to see higher levels of grower shareholding in the company, we are continuing the Grower Investment Plan, so that growers who wish to increase their shareholding in the company can do so over time, and in an achievable manner, cash flow wise. I trust that our performance to date warrants your trust in us as an investment.
I would confirm that, consistent with our initial pledge, directors’ fees were not paid by Australia’s Oyster Coast Ltd during 2017-18. We said that this would not occur until the company was operating profitably. The business’ operations are larger and more sophisticated, so from 1 July this year, the non-Roc directors in AOC Private are receiving a $10,000 per annum director’s fee (with a $20,000 fee for the chairman). I will also receive a $10,000 per annum fee as chair of Australia’s Oyster Coast Ltd as from July 2018.
Current Year’s Progress
For the current financial year, we are again targeting substantial growth in oyster sales compared with 2017-18. Some of these will come from our own farms, but the majority will still be sourced from our grower shareholders. So far, we have sold around 250,000 doz, which puts us well ahead of the comparable period last year, and on track to meet our target.
Sales in October amounted to just under 80,000 doz, a monthly record, and more than double sales in October 2017. This financial year, we have purchased oysters from 35 growers (not counting company-owned farms) and for the past 12 months from a further 24.
Logistically, we are now heavily constrained at our facility at The Vista, Batemans Bay, which we have occupied for the past couple of years courtesy of Jim and John Yiannaros, loyal grower shareholders. The development application for our new facility in Cranbrook Rd is currently being considered by the Eurobodalla Council; we hope to be fully operational there around April next year.
Just as the early period of Australia’s Oyster Coast Ltd operated at a loss, while staff were recruited and other business costs incurred ahead of revenue generation, so this year will be a transition year for the new company.
We have expanded our management team, with a new CFO, Devin Watson, Marine Operations Manager, Ben Ralston, and Post-Harvest Operations Manager, Waite Derwent, complementing our CEO, Mark Allsopp and Sales Manager Craig Smith. I think shareholders can be very impressed with the calibre and commitment of our management team. We are also investing heavily in technology upgrades at our new farms, the benefits of which will take a further one and two years to come to fruition.
So, I expect the operating company will incur a trading loss in 2018-19, before moving to profitability the following year. However, the accounting standards require us to bring to account increased stock values and numbers as they occur, that is, prior to the product actually being sold. We do not yet know the full extent of this increase in value, but it will be substantial.
Having acquired seven farms so far, we have been approached by the owners of several others to gauge our interest. We now have a good sense of lease values, and while it is tempting to continue further acquisitions, the board and management have judged it is more important to consolidate first. This is consistent with an approach which stresses quality and consistency above all else.
Over coming months, it is likely that Roc’s final $5 million capital will be transferred to the company. Accordingly, it is desirable that Australia’s Oyster Coast Ltd match this on a pro rata basis, in order that our existing 25 percent equity share in the operating company can be maintained. To do this requires $1.67 million from existing (or new) shareholders. I have previously flagged this in a shareholder letter and am grateful that several shareholders have responded with a willingness to consider increasing their investment, subject to being satisfied with the terms and conditions.
Let me now turn to the recent media coverage the company has received, especially three articles in the Sydney Morning Herald. The first point to register, and it is not a trivial one, is that if we were having no impact in the market place, we wouldn’t be newsworthy. To that extent, I think we can take the coverage as a compliment.
Unfortunately, the articles contained a number of misleading statements and assertions. I am critical of their authors for accepting these assertions too readily, without either genuinely checking them with us, or asking themselves what might lie behind the complaints being made.
For example, the company was referred to as being “loss making” without it being acknowledged that we had openly flagged that trading losses would be incurred during our start-up phase. There was no checking whether our forecast move to profitability in the 2017-18 year had occurred. The answer to this misinformation is clearly apparent in our annual accounts which I have discussed.
Another claim made was that my last two AGM addresses “had been removed from our website”, implying some act of concealment or embarrassment. I have no idea where that claim originated, and when I saw it I was quickly able to display those addresses, from the UK where I was at the time.
A repeated complaint was that, once we owned farms, we would no longer purchase oysters from other growers. I don’t know how many times I have to stress the converse: our decision to purchase farms was triggered because supplies from grower shareholders were insufficient relative to demand. We continue to seek additional quantities of quality oysters from our suppliers: the more we can sell, the more influential we can become in the market place, which can benefit all growers.
The two or three disgruntled growers who were quoted are either non-shareholders who declined to support us at the outset, or a shareholder who has scarcely supplied us with product. Growers are entitled to become shareholders or not, according to their preference, but the grievances of non-shareholders, who lack a good understanding of what we are doing, do not, in my opinion, merit much respect.
One particularly egregious, anonymous, claim was that the company purchased its first farm, owned by David Maidment, for above its market value. David was and is a director of the company. For the record, he did not take place in any board deliberations in respect of his farm; he left the room and did not receive relevant paperwork. The farm was independently appraised by a knowledgeable and respected grower shareholder. A follow-up inspection and appraisal was made by two other grower shareholders. The purchase price was consistent with those appraisals. The board has established appropriate governance protocols from the outset and adheres to them rigorously.
Another complaint was that the company has become too big and is crowding out smaller operators and distorting lease values. As I mentioned earlier, we now own a mere 3 percent of NSW aquaculture leases. Our purchases have been on a willing buyer/willing seller basis. It’s called the market, and long may it continue. We are proud of, and make no apology for, bringing a new professionalism to the industry, providing a closer link between grower and consumer, lifting the product quality of our suppliers and providing them with regular feedback, raising the profile of oysters at high-end restaurants, and helping to improve grower financial returns as has occurred over the past two-three years.
Perhaps the sharpest criticism concerned the portion of equity provided through the Go NSW fund, one of the two Roc investment funds, which ultimately comes from Jobs for NSW, a NSW Government regional investment fund. Some claims were made that this was a grant, and should have been open to other growers. It is not a grant, it is an investment which will be expected to produce a commercial return. Regardless of one’s view about the appropriateness of taxpayer funds being allocated for private investment, the fund is established and a mandate has been provided to Roc for its investment in ventures meeting regional, employment and agribusiness objectives. It was Roc’s decision to allocate some of those funds to our business.
By contrast, it was nice to see the more balanced and positive presentation on the ABC’s Landline program on 4 November – a link to it appears on the company’s website for any shareholder who missed the program.
Clearly, we would prefer to have supportive media commentary than critical commentary. We will work constructively with media representatives to present an accurate assessment of our activities wherever we can. But ultimately, our track record and financial results will speak the loudest and we are content to keep our heads down, focus on our priorities and the business, and work hard on behalf of customers, suppliers, staff – and of course, shareholders.
The next twelve months promise to be every bit as active as the past twelve months have been. I look forward to being able to report our further progress then, including showing shareholders through our new processing facility.
I would now like to invite our CEO, Mark Allsopp, to screen a short video and present his report, following which we will attend to the formal part of the business of today’s meeting.
16 November 2018