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Considering global population growth and the rapidly expanding middle class in emerging markets, investing in agricultural stocks would seem to be as close to a sure thing.  However, agricultural stocks are notoriously volatile, in large part due to dependence on the vagaries of global commodities speculation.  Perhaps the biggest risk of all comes from a natural phenomenon – the weather.  Drought in California in the US brought that state’s world leading almond industry to its knees, much to the benefit of ASX listed almond producer Select Harvests Limited (SHV).

Private equity firm Kaplan Equity Investment recently acquired a 12.4 per cent stake in Australian agricultural firm Ruralco Holdings (RHL) and a 5.32 per cent stake in Australian beef company Australian Agriculture Corporation (AAC). Here is what the firm had to say in a briefing paper to investors:

“Australia is an efficient producer of agricultural commodities such as meat, dairy and broadacre crops and is geographically advantaged in selling to Asian markets which have large populations, have rapidly growing incomes and are increasingly consuming protein and adopting Western diets.”

Takeover bids for Graincorp Limited (GNC) and Goodman Fielder (GFF) are seen by some as evidence of the long term strength of the Australian agricultural sector.  Yet wildly volatile weather and commodity prices have combined to contribute to a less than spectacular performance for many agricultural stocks over the last few years.  Looking forward, however, there are several prospects that look promising, according to analyst estimates.

The following table lists ten “pure play” or near pure play agricultural stocks by market cap.  Seven of the ten have solid numbers while the bottom three could qualify for entry into the punters’ paradise category.  Here is the table:

Company

(Code)

Market Cap

Share Price

52 Week % Change

Dividend Yield

P/E

P/EG

2 Year Earnings Growth Forecast

Australian Agricultural Co

(AAC)

$57.4b

$1.27

+22%

25.15

0.47

+53.4%

Nufarm Limited

(NUF)*

$1.2b

$4.36

-6%

2%

14.94

0.64

+23.3%

Tassal Group Ltd

(TGR)

$584.5m

$3.99

+122%

2.8%

16.05

0.95

+16.9%

Warrnambool Cheese and Butter Factory Co

 (WCB)

$453m

$8.08

+98%

1.6%

23.37

0.31

+74.3%

Select Harvest Limited

(SHV)

$293m

$5.10

+72%

3.2%

9.42

0.46

+20.7%

Ridley Corp

(RIC)

$256.6m

$0.83

+4%

14.6

0.51

+28.8%

Ruralco Holdings Ltd

(RHL)

$201.4m

$3.68

+24%

5.2%

17.74

0.51

+34.5%

Elders Limited

(ELD)

$59.2m

$0.13

+30%

-91.8%

Clean Seas Tuna Ltd

(CSS)

$49.7m

$0.045

+165%

Cell Aquaculture Ltd

(CAQ)

$38.9m

$0.12

-40%*

30.0

 

While the P/E ratio is the favored metric of many investors, those looking for stocks either fairly valued or undervalued look to the Price to Earnings Growth Ratio.  The PEG substitutes historical earnings used to calculate the P/E with analyst earnings growth estimate which in theory gives the investor a better idea of a stock’s future potential.  A P/EG of 1.0 indicates a stock is fairly priced and anything below 1.0 is generally acknowledged to be a sign of a potential bargain.  A P/EG under 0.5 sets the blood pumping in both value and growth at a reasonable price (GARP) investors.

Note that all of the seven major stocks in the table have a P/EG under 1.0; and three are under 0.5, with double digit two year earnings growth forecasts across the board.  None of these companies have seen dramatic declines in share price over the past year.

Although Australian Agricultural Company (AAC) is best known as our largest producer of beef and live cattle for export, the company is also a major landholder and producer of feed grain, wheat, sorghum, and cotton.  Government bans on the export of live cattle have hurt AAC but now the company is building a major meat packing operation in Darwin, enabling export of processed meat both here and throughout Asia.  The Darwin facility is scheduled to commence operation in September 2014 and will add an additional revenue stream for AAC.

Australian Agricultural Company is one of six stocks in the table that produces consumable food products.  Nufarm Limited (NUF) is the first of the four stocks that make enabling products for agricultural needs or provide agribusiness services.  The company makes products that protect crops from pests, weeds, and disease; as well as seeds and seed protection products.  Growth in crop production to feed both people and animals would benefit Nufarm substantially, but the company has had its share of troubles, largely due to the loss of a distribution agreement with US based Monsanto for its Roundup line as well as the loss of rights to distribute products from German based BASF.  

The loss of the BASF rights was announced on 23 January 2013, sending the share price plummeting.  Here is a two year price movement chart for NUF.

The loss of the Roundup business came on 05 March 2013, continuing the deep slide.  Nufarm has responded with debt restructuring and closing of some operational facilities and reorganization of others.  On 26 March the company released Half Year 2014 results showing a 22% revenue increase and a 124% jump in net profit after tax with management attributing the positive results largely to the health of its South American operations.  The share price has been moving upward since the announcement.  

One agribusiness stock that has thrived over the last several years is salmon farmer Tassal Group Limited (TGR).  With hatcheries in Tasmania producing Atlantic salmon the company distributes in a variety of forms, Tassal Group has handsomely rewarded its investors, with a 45.1% average annual rate of total shareholder return over three years; 16.7% over five years; and 19.5% over ten years.  The share price is up close to 200% over two years, vastly outperforming the ASX 200 XJO Index.  Here is the chart.

About three years ago Tassal Group management made the decision to focus on increasing higher margin domestic sales rather than chase the lower margin and more volatile export market.  The company’s Half Year 2014 results reported on 13 February provided evidence the strategy is working as earnings improved despite relatively flat revenues.  Revenues for the period declined 0.2% while net profit after tax rose 42%.  While Tassal’s current dividend yield of 2.8% is currently unfranked, analysts’ 2 year estimate for dividend growth is a robust 30.6%.

Shareholders of Warrnambool Cheese and Butter Factory Company (WCB) gleefully watched the bidding war to acquire WCB heat up in 2013, leading to the nearly 90% stake bought by Canadian dairy firm Saputo Inc. The deal finalised in February 2014.  Here is a two year chart for WCB.

Analyst estimates for WCB seem to justify the bidding war as this company has the lowest P/EG and the highest two year earnings growth forecast of any stock in our table.  Warrnambool’s Half Year 2014 Results reported on 28 February provide corroborating evidence for the belief in burgeoning Chinese demand for dairy products.  Revenue increased 25% and NPAT rose 104%, with Warrnambool management attributing the rise to strong demand in China.  

Australian rival Bega Cheese (BGA) lost the bidding war for Warrnambool, but its share price rose nearly 80% year over year during the back and forth offers.  However, Bega has a two year earnings growth forecast of 11.9% and a P/EG of 2.28, which pale in comparison to WCB.

Despite its impressive 72% run up in share price over the year, health food and nut producer Select Harvests Limited (SHV) has the lowest P/E of any stock in the table.  The company’s principal product is almonds, grown on its own orchards.  Other products include a variety of health foods ranging from nuts to muesli.  Select Harvests markets its products in Australia, Asia, Europe, and the Middle East.

It is a sad fact that the company has gotten a major boost from the record drought in California, now more than two years old; but Select Harvests has had its own weather-related problems with wet weather accounting for profit declines in FY 2012.  In addition, the company has been hit by the strong Australian dollar over the past several years.  The drought in California coupled with demand for healthier foods in general and almonds in particular have driven up the price of SHV’s products, which bodes well for the company’s future.  Half Year 2014 results reported in February included an impressive 118% NPAT increase and a 166% rise in earnings per share.  The current dividend yield of 3.2% is fully franked and the two year dividend growth estimate is 27.9%.  Here is a two year price performance chart for SHV.

Providing feed and nutrient supplements to livestock producers is the core business of the Ridley Corporation (RHC).  In addition to serving the beef, dairy, poultry, pig, and sheep producers, the company also provides products for the recreational (pet dogs) and equine sector.    The company began exiting its salt operations in late 2012 and completed its exit in February 2014.  Ridley has property development plans in progress for its surplus properties.  Half Year 2014 Results reported in February showed a 28% increase in revenue, with net profit swinging from a $12.7 million loss in the Half Year 2012 to a $9.8 million profit.  The company’s Ridley’s AgriProducts reportedly make it Australia’s largest locally owned provider of animal nutritional solutions, but its share price has been highly volatile over the past year.  Here is the chart.

In addition to the improvement in the Half Year Results, the company has reinstated dividend payments, announcing an April/October schedule of $0.015 per share.

The final agricultural service provider in the table is Ruralco Holdings (RHL).  The company is broadly diversified, with six revenue streams.  Rural supplies include crop protection products, fertilizer, water management systems, and other products for rural farming operations.  Ruralco has more than 500 local distribution outlets.  The Wool and Livestock segment provides marketing and feedlot services for sheep, dairy, and beef farmers.  Grain Marketing subsidiary Agfarm markets grain and the Financial Services segment offers insurance, risk advisory services, and credit solutions.  Ruralco offers property management services as well as traditional real estate agency services.  Finally, the latest addition is Water Solutions, offering irrigation planning and installation services.

Although not lacking in volatility, the share price of RHL is up more than 80% over five years.  Here is the chart.

On 20 May Ruralco reported Half Year 2014 Results, posting a 13.7% increase in total revenues with a 57.4% rise in underlying NPAT.  Company management is responding to growing beef and dairy demand in Asia and Europe by establishing a live export business.  

Ruralco has an 11% interest in the first of the three punters’ specials in the table, Elders Limited (ELD).  At one point Ruralco was reportedly interested in buying out its smaller rival, but that time may have passed as Elders appears to be a shadow of its former self.  For the Full Year 2013, Elders reported a loss of $505 million. This followed a loss of $60 million in FY 2012 and a loss of $395 million in FY 2011.  The company’s CEO departed in November 2013 and Elders is shedding operations not directly related to agribusiness to turn itself around.  In May 2014 Half Year Results showed a loss, albeit a smaller one, which the new CEO claimed is evidence the company’s fortunes are improving.  The company’s debt load also went down somewhat but still sits at around $237 million and a capital raise or restructuring is likely.  Elders can trace its origins all the way back to 1839 and in modern times traded at around $27 per share as recently as 2007.  Its track record since has been abysmal to say the least.  Here is a ten year chart for ELD.

Clean Seas Tuna (CSS) has seen continual revenue declines in each of the last three fiscal years along with profit losses each year, from a loss of $32.4 million in FY 2011 to a loss of $34.5 million in FY 2013.  Yet the share price is up close to 170% year over year, as investors are buying in to the company’s turnaround story.

On 21 December 2012 the company announced an operational change, putting its development efforts towards propagation of Southern Bluefin Tuna on hold in favor of aggressively pursuing Yellowtail Kingfish operations, but was not as yet successful in finding a strategic partner to fund the transition. The initial reaction was negative, but within eight months, the share price began to rise.  Here is a two year price chart for CSS.

Clean Seas has had successful rights offerings to generate funding capital on its own and it would certainly appear investors are well aware of the growing demand for Yellowtail Kingfish as the share price has continued its wild but steadily upward trajectory.  The latest operational update issued on 16 April announced successful progress in reaching production targets for Yellowtail and stated the company now expects to reach underlying profitability a full year ahead of the previous guidance for profitability in FY 2015.  

Certainly there is high risk with a stock like Clean Seas, but the fundamental story and strategy appears sound.  The demand is there and Clean Seas may be successful with its increasing supply.

Some turnaround stories that stoke the dreams of punters appear less plausible, at best.  Cell Aquaculture (CAQ) emerged from voluntary administration entered on 20 November 2012 and was readmitted to the ASX on 18 September 2013.  In a Pre-Reinstatement Disclosure the company explained its new business plan, funded by a capital raise completed on 23 August.  

Cell Aquaculture originally listed on the ASX in 2005 and attracted investor interest with its “Hatch to Dispatch” aquaculture system.  The system was trademarked as the EcoCell system with its founder a director of the company.  EcoCell allows premium quality seafood to be produced on land and after opening at $2.00 the share price shot up to $3.50 and has been falling ever since.  Here is a ten year chart.

In the investment prospectus for the August 2013 capital raise, the company outlined its past mistakes that resulted in its running out of funds and entering administration, with most due to fisheries development projects in a multitude of locations, from Thailand to Malaysia.  The last paragraph of the business plan section of the Pre-Investment Disclosure statement includes the following statement:

•    Expansion and joint ventures in poorly understood markets will no longer be a feature of the Company’s business plans.

The share price shot up shortly after reinstatement, prompting an ASX speeding ticket, and has been rising since.  Here is a one year chart.

Note the second major spike in March.  This followed the company’s announcement of a “heads of agreement” (a non-binding agreement subject to final approval) to take on two new projects, paid for with CAQ shares.  And the projects?  The Roxy Casino in Bavet, Cambodia and the Haikou Free Trade Zone Project, a shopping centre in China!

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