Fund manager stock pick: ABB Grain (ABB)
Current share price: $8.99
Fund manager: James Anderson, chief investment officer at Anderson & Tees Funds Management
Over the next 12 months Credit Suisse expects to see the grain industry experience its biggest upturn in decades: the catalysts being deregulation of the wheat export market and an anticipated positive cycle of Australian cereals.
The Swiss-headquartered financial services group picks ABB Grain as the top grain player to take advantage of the opportunities that will inevitably arise.
Chief Investment Officer James Anderson of Anderson & Tees also likes ABB Grain’s prospects. Amid all the gloom of the past week ABB stacked on 21 cents and at the close on Friday was sitting at $8.99.
Anderson believes that grain will be “the next commodity to take off, driven by export into Asia and Egypt”. Echoing Credit Suisse’s forecast he states that ABB will be the principal winner during the buoyant times ahead for this sector.
What we’re seeing recently is that all the grain companies have picked up,” says Anderson, noting that “even the Australian Wheat Board had a price rise. I think there is gradual recognition that some structural growth is occurring.”
In a December report on the Australian grain industry Credit Suisse states: “High commodity prices will encourage increased plantings resulting in higher grain volumes, weather permitting. We think high commodity prices are here to stay as we posit structural imbalances global demand and supply, especially in cereals”.
Anderson says a significant factor is that as the Chinese become more affluent and look to diet changes they are moving towards a Western diet.
A deregulated wheat market may stimulate a bout of consolidation and ABB’s management team, which has a successful history of acquisitions, has stated that it intends to pursue further acquisition opportunities.
By scrapping its dual-class share structure (created when the company was privatised in 1999) in July and adopting a single class of shares, ABB’s management has positioned the company to participate in industry rationalization.
A-class shareholders – growers – voted to redeem their shares, enabling the agri-business to have a system of just one class of share. The company has stressed that it remains committed to its growers.
Credit Suisse notes that deregulation of the wheat market will increase the available market for ABB, which is Australia’s largest barley exporter, “and it should be able to increase its existing trading and export business in wheat”.
The change to a single shareholding means that ABB will be better positioned to flex pricing power for storage and handling. Theoretically this was more difficult when growers controlled the board.
The company successfully captures the majority of Australia’s export barley marketing from its South Australian base and is increasing its marketing presence in other grains and states. It accumulates and then exports grain from all the grain-growing regions in Australia and NZ, including barley, wheat, sorghum, canola, oats, triticale, chickpeas, lupins, lentils, rye, safflower and maize
ABB was created at the outbreak of WWII as the Australian Barley Board. It coordinated the acquisition and marketing of barley across Australia until 1942. It was corporatised in 1999 and listed on the ASX in July 2002. In 2003 the company acquired Jossco, thereby expanding its commodity trading activities. In late 2004 ABB Grain was formed by the merger of three SA-based grain companies – ABB Grain, AusBulk and United Grower Holdings.
ABB’s nominated growth strategies for 2008 and beyond include expanded operations in New Zealand, a focus on Ukraine growth opportunities and increasing its “Pastoral and Rural Services” (growing its new wool trading business, expanding its agriculture fertilizer operations and increasing its financial services, livestock and real estate businesses).
Anderson admits that if Australia’s worst drought on record continues it poses a risk. “It will be a battle between rising prices and demand and the drought,” he says.