Scales Corp will have about $220 million in its war chest to pursue merger and acquisition opportunities after the country's largest apple grower sells its cold storage businesses to US-based Emergent Cold, according to brokerage Craigs Investment Partners.
Christchurch-based Scales said last week it had agreed to sell its cold storage businesses Polarcold Stores Ltd and Whakatu Coldstores Ltd, which were merged on Jan. 1 under the Polarcold brand, to Emergent Cold for $151.4 million, subject to Overseas Investment Office approval. The OIO process could take six months, and the transaction gives Scales merger and acquisition capacity of about $220 million, Craigs research analyst Adrian Allbon and research assistant Luke Mills said in a note to clients.
Scales is New Zealand's second-biggest apple exporter after T&G Global and has invested in apple crops that are sought after by customers in Asia, where the sweeter, redder varieties fetch a premium price over more traditional varieties. The company has low levels of debt and is hunting for agribusiness acquisitions that would fit well with its export apple business, consistent with its aim to become the foremost investor in and grower of New Zealand agribusiness.
"We think SCL has exited their cold storage operations at a solid price which is broadly in line with what we would have implicitly been carrying this division in our group valuation," Allbon and Mills said in their report titled 'Cashing out for warmer opportunities'. "That being said, a key and open question looking forward is how these proceeds are re-deployed within SCL’s refreshed strategy of focusing more on pure agribusinesses, export-led and with the opportunity to add value from existing Chinese relationships."
Scales is most likely to use the funds for merger and acquisitions, given the organic growth opportunities in its existing Horticulture and Meteor businesses could be largely satisfied by internal cash flows, according to the Craigs report.
In its 2017 financial year, Scales reported earnings before interest, tax depreciation and amortisation of $61 million and average net debt of $54.8 million, giving it a debt/ebitda ratio of 0.9 times.
Earlier this month, Scales said it remains positive with regard to its 2018 financial performance, with all three divisions (horticulture, storage & logistics and food ingredients) trading well during the first quarter of 2018 and including this year’s apple harvest.
Shares in Scales last traded at $4.90, and have gained 44 percent over the past year.