Circular to Shareholders

Response to open letter

Dear Shareholder

Brisbane Markets Limited (BML) is issuing this Circular to Shareholders in response to a full page advertisement placed by VGI Partners (VGI), a BML shareholder, in the Courier-Mail on Saturday 2 November 2019. The advertisement took the form of an open letter to BML Chairman, Anthony (Tony) Joseph.

BML wishes to note for the record that it welcomes and invites any queries that a shareholder has in respect of BML or its operations. Shareholders are entitled to ask questions and BML respects that process. However, the BML Board strongly rejects the accusations and criticisms levelled at BML and remains committed to delivering on its strategic plan over the long-term.

VGI highlights in the advertisement that through various funds managed by VGI Partners they collectively own 15.7% of the issued shares in BML. While criticising the performance of BML, it is worth noting that prior to June last year, VGI only owned 2.2% of BML’s issued share capital. Their increased holding in BML came from purchasing shares from another existing shareholder in July last year and their subscription for further shares in BML’s capital raising in August 2018.

In relation to the matters raised and questions asked by VGI, BML provides the following information to its shareholders:

1) As highlighted in VGI’s letter, the new Multi-level Car Park was opened in March 2018. They state that no mention was made of the car park in the 2019 Annual Report and that “Entry Fees and Parking actually declined between 2018 and 2019”. Clearly, March 2018 is in the prior financial year and therefore, as you might expect, was not specifically mentioned in the 2019 Annual Report.

While “entry fees and parking” revenue did decline by $1,000 (one thousand dollars) in 2019, within the disclosed figure in the Annual Report of $2.844 million (page 26), total parking revenue received actually grew by 7%, offset by some minor declines in Weekend Markets entry numbers, the impact of the closure of the Eagle Farm Market and some reductions in the parking charges for specific parking areas. In terms of the construction of the car park, what VGI fail to recognise or mention, is that it was constructed as, and remains, part of the overall Master Plan for the site, allowing for land utilised in providing two pre-existing bitumen car parks to be repurposed for the construction of two new warehouses. Of these, Building E1 (J.H. Leavy Distribution Facility) is a 6,314m2 warehouse which is currently under construction and Building C1 (Montague Produce Facility), a 5,541m2 warehouse which was completed earlier this year.

When both of these new warehouses are completed, they are expected to contribute in excess of $2.3 million per annum in rental revenue.

The construction of the Multi-level Car Park was undertaken after due consideration on the basis that it:

  1. promotes safety with the removal of over 200 passenger vehicles from inside the site;
  • facilitated the construction of two new warehouses with the resultant increases in revenue;
    • creates options in relation to the future operation of the Retail/Food Market activities;
    • will be a longer-term asset supporting the effective operation of the Markets, with an expected life of over 40 years; and
    • ensures that BML continues to provide an adequate number of car parks at the site to meet Brisbane City Council requirements.

All investments made by BML are considered by our Board and the Strategy and Investment Committee, which is chaired by one of our Independent Directors, Stuart Lummis.

  • VGI questions why the carrying value of BML’s investment properties have fallen. The fact is that the properties owned by BML have not fallen in value. The valuation undertaken by Charter Keck Cramer (Charter) shows an increase from $314.6 million to $329.6 million when comparing the June 2018 valuations to the June 2019 valuations (Annual Report, page 34, note 5 (a)). A summary of note 5 is included below, highlighting how the carrying value of

BML’s investment properties was determined.

Carrying amount of freehold land building and improvements as at 1 July 2018314,600,000
Revaluation decrement(8,434,000)
Other adjustments – net498,000
Carrying amount at end of financial year (30 June 2019 Valuation)329,600,000

The following information provides a more detailed explanation relating to this matter:

  • The Additions amount of $22,936,000 referred to in the table above (and note 5 of the Annual Report), reflects capital expenditure incurred by BML on various site upgrading and development projects. This is the total amount actually incurred and includes capital expenditure on both new income and non income producing site upgrading and new infrastructure, as referred to on page 14 of the Annual Report.
  • Charter undertakes valuations of BML’s assets based on information provided in relation to current and future revenue streams and operating expenses and makes various assumptions based on their expertise and professional judgement. Valuations of BML’s assets are undertaken every six months, noting that the revenue and operating expenses can increase or decrease, which has an impact on the valuation.
  • BML has an ongoing capital expenditure budget that invests in the property via a broad scale improvement program. Capital expenditure is allocated to keep the property compliant with legislative requirements, for improvements to operating efficiently, as well as cosmetic improvements to maintain market presence and keep the accommodation and facilities provided up to modern requirements. Some of this expenditure does not directly or immediately correlate to additional revenue streams however, it does contribute to the longer-term sustainability of the Brisbane Markets asset, which is an important part of BML’s strategic plan. Such items include toilet refurbishments, roof replacements, Building E1 enabling works, road resurfacing and the installation of RCD protection as detailed in BML’s Annual Report on page 14. These capital expenditure items impact on valuations.

Shareholders should note that for the 2016 and 2017 years, there was a substantial increase in property value which made a contribution to the statutory net profit for those years of $21.42 million and $11.6 million respectively, under the current BML board and management and under a consistent long-term strategic plan.

Clearly, BML is committed to the longer-term operation of the site, which does require an ongoing and significant investment in regular upgrading of the site. Not all investment can be new assets which produce additional revenue streams, and assumptions relevant to valuations can change over time. There must be capital expended in the replacement of aging infrastructure, which does improve the amenity and quality of the investment property assets over the long-term, but not necessarily growth in income. A factor that has a significant and positive impact on our tenants.

  • VGI highlighted that as at 30 June 2019, BML had total debts of $133 million, up by $45 million over the past five years. They question “as earnings fall, is it prudent to continue with a capital expenditure program funded by yet more debt?”.

BML’s position is that the key focus for a shareholder should be the underlying earnings of BML, which continue to grow.

The statement made by VGI are incorrect. Underlying earnings have continued to increase, and in the past five years operating revenue relating to just the operation of the Brisbane Markets has increased from $39.882 million in 2014 to $44.398 million in 2019, or 11.3%. We have no reason to believe that the operating revenue will not continue on this trajectory and increase in future years as the significant revenue producing projects outlined in the Annual Report are completed.

Similarly, over the same period BML’s underlying profit before income tax has increased from $11.2 million to $15.28 million or 36.4%.

In relation to BML’s level of debt, the funds have been utilised in the ongoing upgrading and development of the site, reflected by the increases in operating revenue as highlighted above, and the increases in the site valuation, which has increased from $222.8 million as at 30 June 2014 to $329.6 million as at 30 June 2019 (an increase of 47.9%). At the same time, BML also funded its acquisition of shares in Perth Markets Limited, an investment of $25.37 million in 2016, which is now valued at $38.06 million.

  • VGI highlights that shares on issue increased by 28% in 2018/19 and they asked “why is the ongoing investment in facilities and infrastructure not leading to increased earnings per share?”. Again, this statement is not correct. The investment in upgrading infrastructure and new facilities over prior years has increased earnings, and it also flows through to increased earnings per share. By way of example, in 2014 the underlying earnings per share was

18.49 cents/share. In 2019 underlying earnings per share was 22.04 cents/share.

In 2019, dividends paid totalled $7.881 million with 54,500,000 shares on issue. In 2014, with 42,500,000 shares on issue, the total dividends paid was $4.569 million.

Critically, it must be recognised that the $38.4 million raised by way of a part payment received in August 2018 and a final payment in April 2019, will take some time to be fully expended by BML. Major revenue producing projects which have been progressed and the projects are expected to commence contributing to the rental revenue received in the 2020 and 2021 financial years.

The very nature of infrastructure assets is that they take time to design and construct and there may be lead times of one to three years before revenue is earned, as highlighted above in relation to the two new warehouses and as detailed in the Prospectus dated 19 July 2018.

VGI has highlighted that there has been a 10% increase in payments to key management personnel. All payments made to directors and senior management of BML are appropriately benchmarked against external data and considered by the Remuneration Committee annually.

A predominant part of the increase (approximately 50%) in question resulted from the CEO cashing out part of his accrued annual leave so as to reduce what was a large annual leave balance, a common business practice.

BML rejects the assertion that there has been underperformance, as asserted earlier in VGI’s letter, and the BML Board considers that all payments made and disclosed within the Key Management Personnel statement on page 50 of the Annual Report, are appropriate for the roles undertaken in the management and stewardship of BML.

VGI highlights that a number of directors, including the Chairman have missed up to three Board meetings during the course of the year. It is interesting that VGI only look at one year when they report on Board attendance figures. There were circumstances in the 2019 year which did mean a number of Directors, including the Chairman, were not able to attend all Board meetings. If we look at attendance figures for committee meetings, the Chairman attended nine out of the nine held. If you look at attendance figures for the past five years, the Chairman has attended 41 Board Meetings out of 45 held, or 91% of Board Meetings. He also attended 36 Committee Meetings.

It is also worth noting that even when Directors are absent from Meetings, they do still receive the Board Papers and they do take the time to peruse the papers and provide their feedback in relation to items of significance under consideration.

VGI questions why the CEO is on the Finance and Audit Committee and the Remuneration Committee. The CEO is a Director and as such, he has been included as a member of both the Finance and Audit Committee (with four other members) and the Remuneration Committee (with two other members). Any governance issues which may exist in relation to this or any other matter being addressed by the Board are appropriately managed at a Board level.

Other comments made in response to VGI’s advertisement:

VGI states that BML was only able to complete its $38.4 million capital raising in 2018 through the support of “200 new shareholders”. This statement is not correct. There were 91 new investors who participated in the capital raising through the underwriter, Morgans Corporate Limited, contributing $6.6 million or 17.2% of the total raising. In addition, there were a further 47 new shareholders who participated in the placement and public offer contributing $14.62 million. This includes three Central Market related entities, Perth Market Group Limited (PMGL), South Australian Produce Market Limited (SAPM) and Fresh State who collectively invested $11.0 million.

The capital raising was heavily oversubscribed, and BML was pleased it was able to welcome 138 new shareholders onto the share register. BML and its directors will, as always, continue to seek to maximise long- term value for its shareholders through execution of the strategic plan.

VGI stated that BML’s “performance compares unfavourably with the well-managed South Australian Produce Market”. VGI does not identify on what basis they have compared the Markets or drawn the conclusions which they have, nor have they attempted to put these comments into context. SAPM and the Brisbane Markets have similarities, but they are also very different in terms of their age, layout, size, etc. BML undertakes regular benchmarking against the other Markets in Australia and is familiar with their method of operation. The BML Board is also of the view that BML’s performance compares very favourably with both SAPM and the Perth Markets.

BML reminds shareholders of our ownership of 41.73% of Perth Markets Group Limited and that it has also made an investment in SAPM. By way of comparison, the table below is a summary of the key comparisons between the Brisbane Markets and SAPM.

 Brisbane MarketsSAPM
Site Age (established)19641988
Number of Buildings4116
Area of Land to maintain (Ha)7722
Number of Leases25770
Number of Daily Site Users4,5001,000
Throughput (million kg)670250
Underling Profit before Tax (2018) 1$14.99 million$6.65 million
Net Assets (2018) 1$155.5 million$72.87 million
Loan to Value ratio 142.2%27.2%
Indicative Yield based on VWAP for the 2018 Year 1, 24.49%4.26%
Operating Expenses as a % of Operating Revenue 148.1%50.0%

1 Financial comparisons are based on 2018 data being the most recent available information published by the South Australia Produce Market Ltd.

2 BML and SAPM both pay fully franked dividends and the tax effect is not reflect in this yield calculation.

Brisbane Markets, due to its size, age, larger scale and other factors does require significant additional expenditure when compared to SAPM, particularly in areas of work health and safety, risk management, site upgrading (building code and fire safety requirements) and site maintenance.

While there are a number of comparable metrics between the two Markets, it is our view that while both Markets perform well, SAPM is on a slower growth trajectory to BML, as highlighted below:

 2013 $ million2018 $ million  Increase
SAPM Operating Revenue 114,18116,10413.5%
BML Operating Revenue 137,34843,27115.8%
SAPML Site Valuation 185,223113,24532.9%
BML Site Valuation 1203,527314,60054.6%

1 Figures are disclosed in relevant annual reports.

VGI stated that the BML Chairman, Tony Joseph, has been Chairman of Brisbane Markets Limited for 25 years. The company only acquired the Markets in 2002 and before that the company was largely inactive. Accordingly, it has been 17 years since BML acquired the Brisbane Markets site and Tony has been Chairman during that period. The period prior to that is of no significance. In any event, it is performance rather than length of tenure which is what is important and for the record, we highlight the following comparisons showing BML’s first full financial year of operation in 2003/04 and the results for 2018/19 – a 15 year period:

 2003/04 $ million2018/19 $ million% increase over 15 years
Underlying Revenue18.65046.571149.7%
Underlying Expenses13.94531.290124.3%
Underlying Profit Before Tax4.70515.28224.7%
Underlying Profit as a % of Underlying Revenue25.2%32.8% 
Total Assets82.728379.422358.6%
Total Liabilities49.764191.772285.4%
Net Assets32.964187.650469.2%
Net Assets as a % of Total Assets39.8%49.45% 
Total shares on issue33,500,00054,500,000 

In our view, VGI’s letter highlights their lack of understanding of the fresh produce industry, the operation of the Markets, property management and building construction. It is your Board’s unwavering view that a longer-term perspective is required and appropriate when managing, maintaining and developing property assets.

The BML Board is committed to operating the Markets in the long-term best interests of Shareholders and the fresh produce industry. This does mean BML has a disciplined and prudent approach to maintaining and upgrading the facility, investing in new infrastructure, managing the operations of the Markets, representing this sector of the industry and engaging with other sectors of the industry and Government as appropriate.

The Board does therefore highlight that the Company’s focus is on “future proofing” the site.

It is also noted that ongoing hostility conducted through the media can cause a significant distraction for senior company personnel. This does obviously come at a cost, be that in time, administrative resources and financially.

While shareholders do have a right to ask questions, there is also a point whereby the levels of distraction caused could arguably be seen to be taking away from those activities which work to add value for the company, and shareholders.

Board of Directors
Brisbane Markets Limited
November 2019

Operating Revenue:The reported revenue in the Statement of Profit or Loss and other comprehensive income, less the property revaluation increment, and adjusted for other one-off or non-recurring revenue items.
Operating Expenses:The reported expenses in the Statement of Profit or Loss and other comprehensive income, less the property revaluation decrement, and adjusted for other one-off or non-recurring expense items.
Underlying Profit before tax:The reported Profit before income tax in the Statement of Profit or Loss and other comprehensive income, adjusted for the property valuation movements, and other one-off or non-recurring revenue and expenditure items.
Underlying Profit after tax:The reported Profit before income tax in the Statement of Profit or Loss and other comprehensive income, adjusted for the property valuation movements, and other one-off or non-recurring revenue and expenditure items, net of tax.
Underlying Earnings per share:The Underlying Profit after tax, divided by the number of shares on issue.
Underlying Earnings:Underlying Earnings is the same as Underlying Profit after tax.
VWAP:Volume Weighted Average Share Price.


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