The NZX-listed holding company should later this year bank $151.4 million from the sale of its Coldstore operations, if and when approval is received from the Overseas Investment Office.
Scales is always keen to add to its “fantastic” Mr Apple orchard, packing and export business but that is more likely to be on an incremental basis rather than bigger scale acquisition, Borland said from China.
Mr Apple is already by far the biggest part of the group, by capital invested and earnings. It is about a third of the way through the selling season, with all the apples picked and packing continuing. There has been a good crop and the selling season is tracking as expected.
Scales also has a food ingredients division, notably the Meateor pet food subsidiary, and it will also be looking at linked investments and new areas.
“We’ll be patient. There’s no preferred way to do it but we have a wonderful opportunity to reset the group to provide very good returns to shareholders. We’re pretty excited about a new path for our 120-year-old company.
“We don’t need to wait for the OIO but that will be a big moment for us,” Borland said.
The Coldstores sale will give Scales a “fairly significant” gain over book value.
China has been a key to Scales’ apple export growth and Borland was there presenting at an Alibaba Global Fresh forum with about 20 other international chief executives.
Alibaba provides an opportunity for very big growth through e-channels, he said.
“The normal retail supermarket sales growth is 6% to 8% but through e-channel is 27% to 30%. That’s what we’re seeing and we want to be at the leading edge of that.”
Scales Corp’s 15% owner China Resources supports the group’s initiatives in the Chinese and wider Asian markets.
Over the last decade Borland and his board have nursed Scales back from a difficult position and seem committed to preserving a strong balance sheet. That is highlighted by the latest December 31 balance date showing a ratio of interest-bearing debt to total assets being just 13.5% with borrowings of $46m to total assets of $342m.
Settlement of the Coldstores sale will pay down the debt and put more than $100m cash in the bank.
Sharebrokers Craigs IP said in a research note that Scales will have capacity for a merger/acquisition deal in the $220m range.
Borland said that is a mathematical capability but the funds could be deployed in different ways, such as two or three deals of $30m to $40m each.
That indicates a continuing careful approach to retaining balance sheet strength.
CraigsIP suggested organic growth opportunities in the existing businesses could be financed from existing cashflows.
The Coldstores business is being sold to Emergent Cold, a global cold chain company. The OIO process is expected to take several months.
The assets being sold do not involve sensitive land, Borland said.
The sale is effective on June 1 so Scales will continue to operate it but Emergent Cold will take the earnings from then and pay Scales interest on the purchase price. If the OIO turns down the application, ownership reverts to Scales.
Scales had been talking to Emergent Cold “for a while” and was also developing its company refresh strategy to focus on the best agri-business assets it can add value to.
The Coldstores business provided a return on capital of about 11% compared to about 20% for the other group businesses.
Scales has set criteria for new investment, serving to its strengths of operating fully vertical agri-business with an export focus and adding value through the Chinese market.
To this, Borland adds businesses with capable and passionate management.
