Australia | Oct 16 2006
By Greg Peel
The Fairfax press is all over AWB (AWB). As the world awaits the findings of the Cole Inquiry the Sydney Morning Herald took the opportunity to splash the photos of sixteen AWB executives across its front page on Saturday, under a banner headline suggesting they may all face charges resulting in potentially one to ten year’s gaol.
An accompanying article featured a graphic of AWB’s tumbling share price, and noted the 66% downgrade to wheat harvest forecasts that have come about as a result of the worsening drought. The day before the fertiliser hit the fan in January AWB was trading at $6.37. At 3pm this afternoon the share price was down a further 5.4% on the day to $2.63.
Of the five brokers and advisors in the FNA database still covering AWB, all rate the stock as Hold except for Aspect Huntley with Avoid. The average target price is $3.92, nearly 50% above the current price. Of the five, two have not reported since the harvest downgrades.
However, the reason for such a high target may be explained by JP Morgan’s ($4.00) view, where the analysts are currently assuming no loss of the “single desk” in its forecasts while suggesting such a loss may well occur. They also note a range of penalties AWB may be forced to pay as a result of the Inquiry, and are simply awaiting the findings before reassessing their stance.
This morning AWB made an announcement to the ASX confirming the third distribution payment to wheat growers participating in the 2005-06 pool, worth $778m.
Last Thursday Reuters reported AWB has suspended exports from the drought-ravaged Australian east coast, intending to meet outstanding overseas contracts with wheat harvested from last year’s crop. South Australia and Western Australia will continue to export to the bigger customers and thus maintain those relationships.
But what caught FN Arena’s eye was a report in the Australian Financial Review today that AWB’s share price continued to fall on Friday on rumours of a potential delivery shortfall against forward sale contracts. Farmers are concerned that AWB has forward sold wheat at $200/t and, given the harvest downgrades, will not be able to deliver its full obligation. This would force the company to buy in wheat, which is currently trading at $350/t.
The size of any shortfall is unclear.
Such a hedging dilemma brings to mind the fortunes of goldminer Croesus (CRS), which forward sold gold and failed to meet its obligations in gold production. This forced Croesus to buy gold on the spot market, and by this stage the gold price was on its way to US$725/oz. Croesus is currently in administration.
The price of wheat is presently pushing higher in the global benchmark contract on the Chicago Board of Trade. Irrespective of the fortunes of US wheat, it is news of the Australian drought that has helped fuel the present rally.
AWB responded to the Fin Review’s queries on the shortfall by saying that information was confidential. This is a curious response.
Under ASX listing obligations, any piece of information that may have a material affect on a company’s share price must be disclosed to the market. AWB has not declared the shortfall to either be non-existent, or immaterial – simply “confidential”.
The information can only be deemed confidential as much as it is immaterial, as if it is material then it cannot remain confidential. If the shortfall is immaterial then why not say so? What single purpose could be behind not shedding light on the subject? If the shortfall is being kept confidential due to fears it will spark further share price falls then the AWB board may yet have more charges to answer.
The Fin further reports that Australian wheat farmers are split as to whether they would like AWB to lose or retain the single desk monopoly. The final decision thus cannot simply be one of whether a publicly-listed company should be punished, but whether it will be Australia’s already struggling farmers who will suffer as a result. It just goes to show how ludicrous was the decision by the government to turn a public facility into a private monopoly. Yet another utility that has caused hardship from not really being either.