If the heavy rain in many parts of Australia over February-March has not broken the drought in all areas, it has definitely improved the agricultural outlook in many areas.
The drought meant that only one-third of Australia’s usual summer crops were planted this year. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) predicts the total summer crop production to fall by 66% to just 878,000 tonnes, which would be the first time in more than a decade it had been lower than 2.5 million tonnes.
But the situation looks a lot better for the winter crops (and for those who gambled on planting a late summer crop). The recent rain across much of Australia’s cropping and pastoral country is likely to see some drought-hit farmers planting winter crops for the first time in two or more years in areas of North-west NSW and southern Queensland. In general, the industry feels that Eastern Australia has not seen the prospect of such a good start to the cropping season for at least three years. Inflows into the Murray-Darling Basin from the big rains to the north have restored natural flows to parts of the basin that have not seen them since 2016.
No-one is arguing that the rains have seen off the drought – the lingering drought hangover will still affect production and farm incomes this year. In addition, the Covid-19 outbreak also represents significant short-term risk to valuable Asian export demand. But the timely autumn rain means that the mood in rural Australia is more positive than it has been for a long time.
The agriculture industry has an ambitious target, to lift farm-gate output by two-thirds by 2030, which would mean $100 billion in produce. Agribusiness Elders expects farm exports to grow by more than 10% from the 2016-17 financial year to FY24, to reach $54 billion. Boosting the industry’s confidence is definite evidence that Asia’s rapidly expanding middle-class markets are willing to pay premium prices for high-quality Australian food. The government has endorsed the target, but achieving it will require the recently improved conditions to improve much more, and for that to be sustained.
Ordinarily, investors would be clamouring to get into an industry with growth plans like that, but it is actually quite difficult for retail investors to invest in farming. This has been exacerbated by a flurry of recent takeovers that have removed some of the sector’s most investable stocks from the ASX, namely:
- Integrated honey producer Capilano Honey (CZZ) – acquired by a private equity consortium in 2018 at just above $20 a share in August 2018. I had described Capilano as a great little story [1] back in November 2013, at $4.19.
- Horticultural and agricultural group Webster (WBA) – Australia’s fourth-oldest business – picked off the stock exchange in February by Canadian pension fund Public Sector Pension Investment Board (PSP Investments), at $2 a share. I had mentioned Webster as being worthy of support [2] back in May 2013, at 63 cents (with a caveat on the low stock liquidity it had then.)
- Nationwide rural services business Ruralco (RHL), taken over in September 2019 by Canadian fertiliser giant Nutrien, at $4.40: I had picked RHL as a “value stock to consider” at $3.02 [3] in January 2019, one month before Nutrien’s first approach.
Here is a look at a group of stocks still flying the flag on the stock market for the nation’s farming sector:
- Elders (ELD, $8.17)
Market capitalisation: $1.27 billion
12-month total return: 38.1%
FY20 (September) projected dividend yield: 2.3%, fully franked (grossed-up, 3.3%)
Analysts’ consensus target price: $8.65 (Thomson Reuters)
Rural services heavyweight Elders has been quiet, in terms of ASX announcements, since January 9, when it issued a market update on the bushfires: the company said it expected livestock commissions to be negatively affected, but also that it anticipated the losses to be offset by increased demand in farm supplies once the rebuilding efforts begin; given this, the company’s trading in the first quarter of FY20 was in-line with expectations, and it maintained its full-year guidance, for a return on capital of 20%-plus and EBIT (earnings before interest and tax) growth of up to 10%.
We will know more with the release of the half-year result, for the period ending on March 31 (Elders’ financial year is to the end of September.) In FY19 underlying net profit was flat, at $63.6 million, on revenue that rose by 4%, to $1.67 billion. For FY20, analysts expect earnings per share (EPS) to slide by about 16% in FY20, before rebounding in FY21. The dividend is seen as rising by about 6% in FY20, to 19 cents.
Although Elders has fallen with the rest of the market in the COVID-19 crash to be down from its $8.81 March peak, at $8.17 it is still 26% up from the end of 2019 – investors appear to have supported the stock on the back of the improving weather, which has eased the tough trading conditions caused by the droughts and bushfires.
- Ricegrowers (SGL, $4.00)
Market capitalisation: $239 million
Rice-growing farmers’ co-operative SunRice listed its B-class shares – which carry the right to receive dividends, but no vote at general meetings of the co-operative, which are limited to the A-class grower shares – in April last year, under the name Ricegrowers Limited, as it moved to the ASX from the National Stock Exchange (NSX), where the B-class stock had traded for 12 years. Valued at $6.50 on the NSX, SunRice shares jumped almost $2 in the first day of trading to $8.30, but the stock has retraced significantly since then – to as low as $3.50 in December – hammered by drought in the Riverina, and consequent rising water prices. However, SunRice has had a good few months, and has recovered to $4.
SunRice is one of Australia’s largest food exporters, selling 30 brands in 50 countries, with operations and assets in Australia, the Middle East, the USA, Papua New Guinea, the Pacific Islands and Asia. Exports – both exported Australian rice and foreign-procured rice (from countries including Pakistan, India, Thailand, Vietnam, Cambodia, China, Taiwan and the US) generate about 75% of the company’s revenue ($1.2 billion in FY19).
Asian markets – a coals to Newcastle story – is 3% of revenue, but SunRice has big plans to grow this, spearheaded by the launch of SunRice-branded baby rice cereal into Asian markets later this year, and specialty and Low-GI rice, backed by Australia’s excellent reputation for provenance. Currently SunRice exports into China, Japan, South Korea, Taiwan, Mongolia, Hong Kong, Brunei and Singapore, as well as milling in Vietnam: SunRice has become an established player in the Mekong Delta rice industry and now accounts for more than 5% of all Vietnamese rice exports.
The strength of the SunRice international operations, with rice sources built up over many years, is that even with a very poor 2019 crop in its Riverina homeland – only 54,000 tonnes, a fraction of the 800,000 tonnes grown in a regular season – the company says will sell 1.1 million tonnes.
At $4, the shares trade on 7.2 times FY19 earnings (at 55.2 cents), which is cheaper, for comparison purposes, than Australian food producers Bega Cheese (28.1 times), Tassal Group (10.9) and Inghams (10.8). SunRice Group expects full-year FY20 (ending October) revenue to be in-line with FY19, but it says second-half net profit will be lower than in the first-half (ending April). Given this outlook, Ricegrowers currently intends to maintain a fully franked dividend at similar levels to prior years: if it maintains FY19’s 33-cent dividend, at $4, SGL trades on an 8.25% fully franked yield, equivalent to 11.8% grossed-up.
- Select Harvests (SHV, $5.68)
Market capitalisation: $544 million
Estimated FY21 dividend yield: 4.9%, fully franked (grossed-up, 7%)
Analysts’ consensus valuation: $8.75 (Thomson Reuters), $9.00 (FN Arena)
Consistency demands that I admit that I tipped almond grower and processor Select Harvests at $8.18 [4] in April 2015, and again as recently as January, at $8.44 [5], as an “export stock doing well.” But SHV has been belted in the COVID-19 Crash, from $9.24 on February 7 to $5.68 – a plunge of 38%.
Select Harvests is one of the world’s largest almond growers, and a large-scale manufacturer, processor and marketer of nut products, health snacks and muesli. It supplies the Australian retail and industrial markets and export almonds globally – the company exports almonds and value-added branded food products to China, India, the rest of Asia, Europe and the Middle East, with about 80% of production exported. The company’s brand portfolio includes Lucky, NuVitality, Sunsol, Allinga Farms and Soland in retail; and Renshaw and Allinga Farms in wholesale and industrial.
Select has just under 7,700 planted hectares of Australian almond orchards, in New South Wales, South Australia and Victoria. About 35% of its orchards will reach maturity over the next eight years, underpinning future growth. The company operates a state-of-the-art almond processing facility at Carina West in northwest Victoria, and a value-added processing facility in Melbourne.
In February, Select issued a COVID-19 update, saying there had been no material short-term impact on its financial performance from the outbreak, but acknowledging that there was significant global uncertainty about the impact the outbreak could have on supply chains and consumer demand. Select said it had just commenced its harvest and marketing campaign for the 2019/20 crop, and expected a “near-term softening in almond prices and demand” because of the outbreak, with the extent and duration of these conditions depending on when the virus can be contained and how soon the Chinese supply chain and factories could return to normal.
Later in February, the company’s annual general meeting was told to expect a lower almond pricing range – because of a larger-than-expected US crop and the virus hurting demand in China – and the implied cut to earnings expectations saw the share price fall by 6%. Analysts see the stock as highly oversold.
- GrainCorp (GNC, $7.63)
Market capitalisation: $1.7 billion
Estimated FY21 dividend yield: 2.6%, fully franked (grossed-up, 3.7%)
Analysts’ consensus valuation: $8.85 (Thomson Reuters), $8.70 (FN Arena)
Australia’s largest listed grain handler is also the ASX’s biggest listed agribusiness. GrainCorp has overseas operations in New Zealand, Europe, North America, India and China. The stock has struggled on the market for several years, particularly since receiving a $10.42 “indicative offer” takeover approach in December 2018 from a company called Long Term Asset Partners Pty Limited (LTAP), which was formed for the sole purpose of taking over GrainCorp. Months of negotiations did not result in a binding bid, and LTAP walked away in May 2019.
Meanwhile, drought and the resultant weak harvests were hurting GNC. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) slumped by $200 million in FY19, to $69 million, and GrainCorp reported a statutory net loss of $113 million, down from a $71 million profit in FY18.
But there have been shoots of recovery. In FY20, the company will have the benefit of a new insurance “safety net” on crop production: in June last year, GrainCorp struck a deal with Aon subsidiary White Rock Insurance for a series of guaranteed production payments that it says would smooth the volatility of east coast grain harvests, particularly during droughts, and effectively drought-proof the company for a decade.
Under the deal, which takes effect in the current financial year, GrainCorp will pay an annual premium of less than $10 million to guarantee payments in bad years: the contract effectively sets a floor on the harvest. Under the agreement, if east coast grain production falls below 15.3 million tonnes, GrainCorp gets a payout; but if the harvest comes in above 19.3 million tonnes, GrainCorp makes a payment to White Rock Insurance. The insurance payment is capped at $80 million a year.
While the insurance instrument protects shareholders in poor seasonal conditions, it also caps the upside in good season. However, it has been triggered in its first year by the weak harvest: national commodity forecaster ABARES predicts 2019/20 winter crop production for New South Wales, Victoria and Queensland at 11.44 million tonnes. In February, GrainCorp said it expected to receive 90% of the $57.9 million insurance payout in March, with the balance paid in the second half of its financial year ending September 30.
GrainCorp has also restructured its business, selling its Australian Bulk Terminals business for $333 million in December last year, combining its grains and oils businesses and planning a spin-off to create a new ASX-listed company to be known as United Malt, in a one-share-for-one demerger. United Malt would be the world’s fourth-largest maltster, and benefit from the global craft beer upsurge. Shareholders vote on that plan today.
- Rural Funds Group (RFF, $1.73)
Market capitalisation: $584 billion
Estimated FY21 dividend yield: 6.5%, unfranked
Analysts’ consensus valuation: $2.30 (Thomson Reuters), $2.30 (FN Arena)
Rural real estate investment trust (REIT) Rural Funds Group is a way to play Australian agriculture as a landlord. Having defended itself against a short-seller attack in August 2019 – and won a court victory against the US short-seller for making “false and misleading” statements – RFF is trying to rebuild its share price. RFF was trading at $2.37 when Bonitas Research LLC brought out its report claiming RFF was “worthless” – although it owns more than $900 million worth of agricultural assets – and that sank the shares to $1.36, a fall of 43%. RFF’s spirited defence has seen the stock move back to $1.73.
The rains would have helped that rise, as would the company’s recent moves to sell its poultry assets in favour of building up its beef cattle exposure. The portfolio is now based around almond orchards, vineyards, cattle, cotton and macadamia assets.
Since 2016, Rural Funds Group has invested about $268 million in the cotton and cattle sector and is investing to improve the productive capability of the assets. Given better conditions, this should show up in favourable revaluations and rent reviews. Indeed, positive revaluations for macadamia orchards and cattle properties were a feature of the first-half result. First half revenue rose by 18% to $38 million, while the distribution was in line with expectations, at 5.42 cents. RFF offers a healthy – albeit unfranked – yield, and scope for further price recovery.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.