Mehadrin published its second quarter report. The four profit lines in it reverse direction on the way down, and it is a good case for explaining how to read an agricultural company's accounts.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| NIS millions | The quarter |
|---|---|
| Revenue | 282.1 |
| Gross profit | loss 19.1 |
| Operating profit | loss 28.0 |
| Pre-tax profit | 0.4 |
| Net profit | 3.5 |
| Attributable to shareholders | 2.6 |
| Basic earnings per share | NIS 0.75 |
| Total assets | 2,281.9 |
| Equity | 877.3 |
The direction reverses twice: a loss, a deeper loss, then positive - and more positive at the bottom line.
What Happened Below the Operating Line
From an operating loss of NIS 28.0 million to a pre-tax profit of NIS 0.4 million - about NIS 28.4 million was added.
An item of that size, turning an operating loss into a profit, is not ordinary financing. At an agricultural company it is usually one of two things: profit from investments or from held companies, or a revaluation of biological assets or land.
Which of them - the structured filing does not set out, so I will not assert it.
And the line after it adds more: a pre-tax profit of NIS 0.4 million becomes a net profit of NIS 3.5 million. That is, the tax line contributed about NIS 3.0 million - a tax benefit, not a charge.
And why a gross loss at an agricultural company is less surprising than it sounds.
Agriculture is a sharply seasonal business. The costs - pruning, irrigation, fertilising, labour
- are spread across the whole year, while revenue is concentrated in the harvest and marketing season.
A quarter falling outside the season can carry full costs against partial revenue, and show a gross loss even in a business that is entirely profitable across a year.
So in a single quarter at such a company, the annual figure is the measure, not the quarterly one. The second quarter, spring into summer, is not the quarter in which the citrus season sits.
This is not an argument that the quarter was good - it is an argument that one cannot infer the year from it.
The Balance Sheet
| Total assets | NIS 2,281.9 million |
| Equity | NIS 877.3 million |
| Ratio | 2.6 to one |
NIS 2.28 billion of assets at a company whose quarterly revenue is NIS 282 million - a ratio that fits a land- and orchard-heavy business, in which the asset itself is the basis of production rather than merely infrastructure for it.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a reminder that not every business is measured in a quarter.
A company selling software or services generates revenue more or less evenly across the year, so a quarter is a reasonable unit of measurement. In agriculture that is simply not true - the tree does not know there are financial statements.
So when I see a gross loss at a citrus company in the second quarter, my question is not "what happened" but "how does it look across four quarters together". A weak quarter in the weak season is a data point; a weak quarter in the strong season is news.
And what does draw attention here is the scale of the item below the operating line - about NIS 28 million that turned an operating loss into a profit. In a business whose operating profit is negative, the net profit comes from somewhere else, and not from the activity.
And that is the distinction I would hold: a positive net profit in these accounts does not say the operating quarter was good. It says something else happened below the line - and what happens there tends to be far more one-off than what happens above it.
(An important note: this is my personal opinion only, and nothing here is a recommendation to take any action.)
