29 May 1998

Genus takes an aggressive line

Some farmers have criticised

the Genus board

management for the

direction the company is

taking. Genus maintains

windfall gains are just

around the corner for its

farmer shareholders. Robert

Harris discovers why

WHEN the going gets tough – expand. Genus, best known for its cattle breeding business, and now owner of several other companies, is in aggressive mood. It intends to spend more than £40m to acquire a new business in the next two or three years.

The move, coupled with internal growth, will prove to existing and would-be shareholders that it means business, says chief executive Richard Wood.

"We need to create a track record which will show potential investors we can handle acquisitions and reap the benefits."

Such a record should boost asset value when the company floats on the stock exchange, he claims. The 28,000 dairy farmer and 1000 employee shareholders could profit by thousands of £s.

Its a bold vision. Three years ago, when Genus was created following the abolition of the Milk Marketing Board, the company had a £49m turnover and made a net profit of £800,000. The following year, turnover slipped to £47.8m and profits halved.

Major restructuring pushed operating profits back to £1.9m in 1996/97, and divestment of redundant assets added £2.8m. But turnover slipped a further £1.2m.

There was no hiding the underlying trend, says Mr Wood. He mostly blames the 3-4% annual fall in UK dairy cow numbers, which cuts turnover by £1.2m/year.

Profits are tight in the shrinking market. Although Genus has about 80% of the AI market (including beef animals), smaller operators with lower overheads claim the rest.

"Every bit of extra market share achieved is hard won at a rock bottom price. It doesnt make sense. Either you cut the size of the business year on year until you pull the plug, or you diversify using existing company skills."

Without change, turnover would have shrunk to £38m by 2002, Mr Wood predicts. He expects to more than double it, visualising a £100m turnover producing an operating profit of £9m.

The change is underway. Interim profits to Sep 1997 hit £1.3m on a turnover of £23.7m. Four acquisitions that year, including farm software specialists Hylton Nomis, coupled with a relaunch of its consultancy business as Axient (which now includes arable and tax advice), helped boost results.

Improvement in the breeding business over the next five years coupled with marketing agreements with Holland Genetics and World-Wide Sires will add £9m to turnover, says Mr Wood.

Further consultancy growth is expected to add another £13m worth of business. But most growth – £40m – will come through acquisition, he adds. "We have been too polarised to the dairy industry. If that catches a cold, so do we."

Share value has already climbed sharply. As an interim measure preceding full stock market flotation, Mr Wood launched Genus onto OFEX, a trading facility for share dealing in unquoted companies.

In the first six months under the new system, 250,000 shares have changed hands between farmers and through a few institutions, including NFU Mutual.

Share prices have risen to 120p as a result. Although down from a high of 145p, that puts the companys worth at about £27.6m. But Mr Wood reckons OFEX dealing methods still significantly undervalues Genus.

He believes its true value will only be realised once the company floats on the stock exchange, mirroring the success of companies like Dairy Crest and Wynnstay. Their share value doubled and quadrupled respectively following flotation.

Mr Wood hopes to silence shareholder critics concern at Genuss direction since he took the helm at the end of December 1996.

"There is a vocal minority, who claim to speak for most shareholders, who want co-op status. I have found grass-root farmers accept our logic and are more interested in the support and good value a strong Genus can provide.

"British people are not co-operatively minded. Often the co-operative business is undervalued, and their potential for expansion is limited. Managers often lack innovation and ambition. PLC status offers opportunity for outside investment, while maintaining farmer control."

The 1997/8 results, due to be published in June, will be awaited with interest by Mr Wood and his critics alike. &#42

Richard Wood: High hopes

Genus statistics

(£m) 1997 1996 1995

Turnover £46.6 £47.8 £49

Net assets £27.6 £23.5 £23

Profit £4.5 £0.43 £0.8

Shareholders: 28,000 dairy farmers1000 employees.