OREANDA-NEWS. August 25, 2011. Black Earth Farming released its 1H11 IFRS financials today (25 Aug) which came in weak, as we expected.

Results summary

- Revenue was up 8% YoY in dollar terms in 2Q11 on the back of crop sales losing 31% YoY, which is attributable to last year’s drought. Average realized prices increased by 91% YoY.

- Costs per tonne more than doubled in 1H11 which did not allow BEF to post any gross margin improvements.

- EBITDA was negative, which is a function of a mismatch between the company’s input costs and output prices. This is partly attributable to the 2010 drought as well as BEF’s production of low-margin crops.

- Debt was flat YoY at USD 121mn while cash on the balance sheet contracted by 40% to USD 63.4mn.

Outlook for BEF’s 2011 harvest and financials

- Crop yields are likely to be low. BEF has already harvested 89% of its winter wheat fields (40% of its total cropped land) and its harvest yield stood as low as 2.5t/ha, which is 42% below the level of 2009 (before the drought).

- Prices are still above last year’s levels but below the level of 1Q11 and 4Q10. There is a chance they could decline even further as Russian agriculture recovers from the drought.

- The decline in operating costs in 1H11 (down 4% YoY) is not significant and is unlikely to offset any potential gross margin decline.

- This implies that BEF is unlikely to generate any positive earnings this year, which is in line with our forecast.

Bottom line

The results are negative for the stock, in our view. BEF did not change its crop mix towards more profitable varieties (like sugar beets and sunflowers) this year when it had USD 100mn in cash on its balance sheet. Moreover, it looks like the company was unable to cut costs for its low-profit winter wheat. We reiterate our negative view on the stock.