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The agricultural sector can be as fickle as the weather, but a bumper season is again generating more investor interest, according to investment adviser Nicholas Brooks, of RBS Morgans. Brooks has established a list of choice stocks that investors can consider including in balanced portfolios, but the sector’s volatility should be taken into account before buying. As Brooks says: “It’s a sector that has provided investors with a roller coaster of returns and headaches in years gone by.”

The stocks chosen by Brooks sit in the food, beverage and tobacco category of the broader consumer staples sector. The Food, beverage and tobacco category consists of about 40 stocks with a total market capitalisation of about $26.1 billion at March 21, 2011, or around 2 per cent of the total ASX market capitalisation of about $1.3 trillion. The food, beverage and tobacco category posted a negative return of 9.89 per cent for the past 12 months compared to a positive 4.18 per cent for the S&P/ASX 200. But over five years, the annualised return for the S&P/ASX 200 was a negative 0.37 per cent compared to a positive annualised return of 5.67 per cent for the broader consumer staples sector, according to Standard&Poors. The companies below are what Brooks considers to offer the best long-term value.     

GrainCorp (GNC)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

GrainCorp is highly leveraged to the grain volumes grown in Australia, and this national storage provider has worked to bolster yearly earnings after acquiring United Malt Holdings. Brooks says record crop sizes of wheat, barley and canola in 2010/11 should generate solid earnings in 2011. “Moist top soil conditions after heavy rains should see next season getting off to a good start, perhaps resulting in two well above average years for GrainCorp,” Brooks says. “Senior management is more than capable of delivering on its strategy, so GrainCorp looks undervalued and is due for an upgrade.” The company booked a NPAT of $80.2 million in full-year 2010, but Brooks expects NPAT to climb to $130 million in 2011.

Dividend yield: 3.42 per cent
Price/earnings ratio: 18.35 times
Market capitalisation: $1.45 billion

Goodman Fielder (GFF)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Brooks says Goodman Fielder is a rarity in the agricultural sector as it pays a high dividend. It’s one of Australia’s leading producers of supermarket necessities, such as bread, milk, margarine, flour and dressings. Record commodity prices in the past 12 months, amid a recent milk price war between Coles and Woolworths, have been challenging. But Brooks expects commodity prices to ease and milk prices to firm. “Current share price weakness provides a good entry point and a high dividend yield makes the short term pain bearable,” he says. Goodman Fielder booked a NPAT of $161.1 million in 2010. Brooks expects NPAT to climb to $183.9 million in 2011 in response to improving margins from lower input costs and the company exiting several unprofitable businesses.

Dividend yield: 9.15 per cent
Price/earnings ratio: 10.04 times
Market capitalisation:  $1.6 billion

Ridley Corporation (RIC)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Ridley Corporation is a leading stockfeed and animal nutrition producer in Australia. Brooks says rain affected harvests downgraded a lot of crops to feed quality. “Excess feed is beneficial to Ridley as it won’t have to pay as much premium,” Brooks says. Ridley also operates a high margin salt refinery business, providing products to consumer markets and food processing companies. “Ridley is a company that, as we saw with CSR last year, could be broken up to unlock value in individual businesses,” he says. Ridley booked a NPAT of $29.1 million in full-year 2010, but Brooks expects it to be higher in 2011.    

Dividend yield:  6.25 per cent
Price/earnings ratio: 12.24 times
Market capitalistion: $369 million

Australian Agricultural Company (AAC)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Brooks describes Australian Agricultural Company as one of the purest agricultural plays on the ASX, or any market globally. Established in 1824, AAC is the custodian of more than 1 per cent of Australia’s land mass and runs more than 485,000 beef cattle. Brooks says AAC has been reducing operating costs from $407 a head to $391, and administrations cost have fallen 28 per cent. The company recovered from a loss a $53.7 million in 2009 to turn a NPAT of $904,000 in full year 2010. Beef production was up 26 per cent in 2010 and Brooks says this trend is set to continue. “A key pick in 2011,” Brooks says.

Market capitalisation: $423 million.
No dividend.

Warrnambool Cheese and Butter (WCB)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Stock holding restrictions capped to 20 per cent for Warrnambool Cheese and Butter will be lifted

on May 15, 2011. Brooks says this may spark a bidding war, with rival Murray Goulburn creeping to 11 per cent on WCB’s registry, indicating an interest in taking over its southern adversary. Bega has also shown interest, building a 15 per cent stake via a placement last year. “Definitely one to watch in 2011,” Brook says.

Dividend yield: 2.68 per cent
Price earnings: 5.08 times
Market capitalisation: $234 million

GrainCorp (GNC) $7.32
Goodman Fielder (GFF) $1.18
Ridley Corporation (RIC) $1.17
Australian Agricultural Company (AAC) $1.61
Warrnambool Cheese and Butter (WCB) $4.38

Price current to market close 23 March, 2011. Fundamental data of companies is current to 21 March, 2011.


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