10 Agri-Stocks to Watch

02 Nov 2012


The chief investment officer for Celeste Funds Management, Frank Villante, points out the chequered history of listed agribusinesses as one reason for the lack of investment appetite.

“The nature of the sector means it is inherently volatile and investor’s appetite for volatility is, more often than not, not that great,” he adds.

The fact that the cycle in the sector is very deep – often lasting five or more years compared with two for other sectors – is another reason for the lack of investment interest.

RBS Morgans analyst, Belinda Moore, agrees it is a hard space in which to invest, especially since corporate activity is culling the number of available stocks in our market.

This means that soft commodities are likely to outperform equities.


“The soft commodity boom, or the step change, in soft commodity prices over recent years is being driven by the four Fs – the demand for food, feed, fibre, and fuel,” Moore says.

“The developing world’s increasing demand for higher protein foods is a big driver [and] the Australian agricultural industry, which is the ‘food bowl’ or gateway to Asia, is best positioned to benefit from [this].”


Nufarm (NUF)

It’s no bargain, but crop protection chemicals maker and seed company Nufarm is one of the best listed routes to gain exposure due to its global reach, according to Villante.

“If there is increased acreage to soft commodities, inevitably Nufarm will sell more farm chemicals into that market,” he says. “Nufarm is the only thing out there that is kind of investment grade[best quality stock].”

Moore forecasts a 9 per cent increase in Nufarm’s earnings before interest, tax, depreciation and amortisation (EBITDA) to $292.4 million for this financial year, partly driven by further operational improvements.

This puts the stock on a price-earnings ratio of around 12.5 times, in line with its global peers.

But high crop prices are likely to lead to a surge in plantings over the coming months. This would leave brokers’ forecast for Nufarm looking too conservative.


Incitec Pivot (IPL)

The company looks better from a valuation perspective, but is increasingly less leveraged to the soft commodity market. It has aggressively diversified from being a pure fertiliser company to an explosives supplier to mining. Explosives accounted for around 54 per cent of the group’s 2011-12 revenue, while fertiliser sales raked in a little over $700,000 in sales.

Having exposure to soft and hard commodity markets is probably not a bad thing, and most brokers covering the stock rate it a “buy”.


Ruralco Holdings (RHL)

The small cap agribusiness company should benefit from any pick up in farming activity as it sells farm equipment, financing, seeds, fertiliser and grain storage to the rural community.

It can also use its strong balance sheet to buy assets. It had taken a 10 per cent stake in Elders before Elders announced it would sell its rural services division. Ruralco said it “can potentially generate material synergies” from buying this division.

While the stock is up close to 10 per cent since July, most brokers polled by Bloomberg still rate it a “buy” for its reasonable 2012-13 P/E of around 10 times and decent grossed-up yield of 8 per cent.

Further, Rurualco has a good track record, although it doesn’t enjoy the geographical diversification benefits of Nufarm.


Warrnambool Cheese & Butter Factory Company Holdings (WCB)

For those worried they have missed the best part of the soft commodity rally, the dairy industry might be a good option because it is a late cycle performer, says Investorfirst Securities analyst, Chris Gibson.

“The US drought has already pushed up a lot of soft commodity prices, which feed into the stock feed prices,” he adds. “A lot of the dairy producers have started to reduce production or their herds.”

The market has yet to fully appreciate the potential drop in supply as dairy prices have not risen as much as grains.

Dairy processors Bega Cheese and Warrnambool Cheese & Butter will benefit from dairy price rises.

While Bega might look more attractive from a valuation perspective, the one to keep an eye on is Warrnambool because RBS Morgans believes it is inevitable the company will be involved in industry consolidation.

Bega owns around 17 per cent of Warrnambool, and the latter holds valuable strategic assets. [Warrnambool] operates the largest and most efficient dairy processing site in Australia,” Moore says.

“The company also operates in one of the best regions for dairy farming.”

Further, the company’s significant export business makes it attractive for bidders wanting to secure dairy supply, particularly those from Asia.


Tandou (TAN)

Those looking for more of a bargain might prefer to look at this water, cropping and pastoral operator. The stock is trading around 20 per cent below its book value and is rated a “buy” by Investorfirst.

“They have got a mixed business of water rights, where they can trade water allocations,” says Gibson. “And in years where crop prices are good, they can switch across to [selling] cotton plus other grains. They can choose what is better value for them [in any given year], crop or water.”

This flexibility gives it some protection from the weather and Tandou provides the most upside to Gibson’s price target of 56¢ among the agri-stocks under his coverage.

But Villante warns valuing the stock is tricky. “It has a mixed operating history and you have to value water rights,” he adds. “It is also very small, very illiquid and that colours people’s perceptions.”


Select Harvests (SHV)

Almond grower Select Harvests is also trading well under book value and for good reason.

The stock has slumped by around 20 per cent in the past year as it has been plagued by product recall, salmonella poisoning, change in management and balance sheet issues, according to Villante.

But those with a stomach for risk and a longer-term investment horizon might find it appealing. “Global demand has been growing consistently above 7 per cent for almonds,” says Gibson. “There was also a period after the global financial crisis and managed investment scheme era where plantings ceased, and it takes seven to eight years for a tree to reach maturity. So in the next two to three years, if demand growth keeps [up], there is going to be a shortfall in the supply of almonds.”

Select Harvest is trading at about a 60 per cent discount to its book value.


Australian Agricultural Company (AAC)

Cattle producer Australian Agricultural Company is another trading at a deep discount to the value of its assets and is also likely to be a late cycle performer.

The stock is trading at a big discount to its net tangible asset value of $2.13 a share because its accounts are very complicated.

But Moore believes the stock represents good value if it dips under $1.30.

Some will be put off by the fact that the company has not paid a dividend since 2008 and is trading on a 2012-13 P/E of 34 times.


Ridley Corporation (RIC)

While stock feed and animal feed supplements supplier Ridley Corporation is also not considered cheap on most valuation measures, its divestment of its salt business has sparked speculation that it makes an attractive target for one of the grain companies.

The stock also has one of the most generous dividend yields in the sector, with analysts forecasting a net yield of around 7 per cent for this financial year.


Lindsay Australia (LAU)

Those more focused on value will have to expand their search outside the agriculture business.

Queensland trucking company Lindsay Australia will fit the bill as it transports fresh produce from that state. A bumper planting season will drive demand for its services and the stock is trading on a P/E of around 7 times for the current financial year and is forecast to pay a yield of over 8 per cent.

But its earnings tend to be lumpy and hard to predict, and the stock is difficult to trade due to lack of liquidity.


Starpharma Holdings (SPL)

Investors thinking outside the box might also be drawn to Starpharma Holdings.

The biotech recently announced that its new agrochemical dendrimer formulations has made glyphosate (a type of herbicide) more effective.

Dendrimers are synthetic polymers that can be used to change the physical characteristics of drugs.

However, agrichemicals is not its core product and its share price performance, over the shorter term at least, will be driven by the success of its VivaGel product to prevent sexually transmitted diseases and treat bacterial vaginosis.


Brendon Lau