Key points
- Australian Agricultural Company has had a hard run, but is investing in new systems and processes, which investors should keep an eye on.
- Capilano Honey is relatively newly listed but has cornered a 70% market share and is doing well.
- A merger between Tasmania-based Webster (WBA) and Mildura-based cotton, pastoral and water management company Tandou (TAN) also warrants attention.
The concept of Australian food producers exporting high-quality food to the hungry export markets of Asia is very real, but it has proven difficult for outside investors to invest in it, for a number of reasons. Here are six possibilities on the stock exchange, plus a well-known seventh company that is headed for a listing later this year.
Fonterra Shareholders’ Fund (FSF)
The biggest food investment opportunity available to Australian investors is Fonterra, the world’s largest dairy company. Although it is a New Zealand company, owned by more than 11,000 New Zealand farmer shareholders, Australians can invest in Fonterra through the Fonterra Shareholders’ Fund (FSF), which has been listed on the Australian Securities Exchange (ASX) since 2012. FSF units are not Fonterra shares: FSF unit holders earn returns based on the financial performance of Fonterra.
[1]Source: Yahoo!7 Finance, 20 April 2015
In Australia, Fonterra’s major brands are Mainland, Riverina Fresh, Western Star, CalciYum, Bega (licensed from Bega Cheese Limited, of which Fonterra owns 9.1%), Perfect Italiano, and Nestlé Ski in Australia. Fonterra operates 10 manufacturing plants in Australia and processes about 1.8 million litres of milk a year, producing 300,000 tonnes of dairy products. It is the second-largest milk processor in Australia, behind Murray-Goulburn.
FSF gives Australian investors the opportunity to invest in something they don’t have – a global food leader. The company exports about 98% of the milk it processes in New Zealand and is responsible for more than one-third of international dairy trade. Fonterra has built up an international brand portfolio across its key markets in Australasia, South East Asia, the Middle East, Latin America and, increasingly, China.
But FSF has not been a great performer for Australian investors. Fonterra has struggled recently, as dairy prices sank to a five-year low in December 2014, before beginning to recover this year. Fonterra was also the victim of a recent poisoning threat. From a peak of $6.68 in May 2013, the share price has surrendered 23%. In 2015, FSF has slid from $5.66 to $5.15.
The full-year payout for FY14 came in at 7.83 NZ cents, down from 22.94 cents in FY13, while the recent interim dividend of 10 NZ cents was down from 15.97 NZ cents for the six months to January 2014.
Australian Agricultural Company (AAC)
Established in 1824, AAC should be the exemplar stock of Australia’s ability to grow and export food. It is Australia´s largest cattle manager, with about 470,000 head of cattle it runs on 21 properties across Queensland and the Northern Territory. The company is vertically integrated, from breeding to processing to exporting, and it has worked hard to gain premium pricing for its source-guaranteed, branded “paddock to plate” beef. AAC is the world’s largest wagyu beef producer. Its beef is exported to more than 20 countries – with Korea the biggest market, accounting for more than 20% of beef sales. But drought, the suspension of live cattle exports to Indonesia in 2011, the resulting over-supply of cattle and the high A$ combined to send AAC into loss in 2012, and it has remained there ever since.
[2]Source: Yahoo!7 Finance, 20 April 2015
But AAC has in its favour the strong growth in global demand for premium beef. AAC’s new Livingstone Beef facility in Darwin, commissioned in February, is a major plank in its transformation into a vertically integrated company. The company still makes a loss, but the stock market has picked up on what it is building: from 98 cents in June 2012, the share price has risen to $1.65. AAC hopes to resume dividends when it starts to get “sustainable and significant positive operational cash flows.”
Capilano Honey (CZZ)
One of Australia’s most successful food exporters is Capilano Honey Limited (CZZ), which exports to 33 countries. Capilano is the largest packer and marketer of honey in Australia, and is one of the world’s largest. The eponymous Capilano brand holds 50% of the Australian honey market and the company’s other brands take the company’s market share to 70%. In FY14, the domestic business accounted for 80% of sales, while exports were 20%.
[3]Source: Yahoo!7 Finance, 20 April 2015
Established in 1953, Capilano gets its honey from about 500 beekeepers, who collectively own about 40% of Capilano. Since listing on the ASX in July 2012, the stock has been a huge success on the stock market, turning its $2 listing price into $11.33.
As an Australian-owned processor, Capilano benefits from the clean, green perception of ‘brand Australia’ in export markets, as well as from domestic shoppers’ preference to buy Australian-made products. The company has launched new products to extend the uses of honey in the cooking, sports nutrition and health and wellness markets.
Capilano has shown excellent capital growth – CZZ has more than doubled in price in the last 12 months – and analysts’ consensus price targets see that rise extending to $12.30. But CZZ has not been much of an income stock, paying a 20-cent dividend in FY14, fully franked, for a historical yield of 1.8%. However, analysts’ consensus expects CZZ to lift that dividend in FY15 to 40 cents, lifting the prospective yield to 3.5%.
Webster/Tandou
An interesting consolidation is under way in the agri-business sector through the merger proposal made by Tasmania-based Webster (WBA) – Australia’s fourth-oldest business – to Mildura-based cotton, pastoral and water management company Tandou (TAN).
Capitalised at $253 million, Webster is the southern hemisphere’s largest producer of walnuts: it is a counter-seasonal exporter, able to offer fresh walnuts to its markets in the opposite six months to the northern hemisphere crop. Webster exports its walnuts to eight countries. Webster has also bought private northern NSW-based cotton, sorghum and chickpeas grower Bengerang (the former PrimeAg) and the Kooba portfolio of Riverina-based irrigation properties. Together, the deals more than double the asset base of Webster to $540 million.
[4]Source: Yahoo!7 Finance, 20 April 2015
Tandou’s board has recommended that shareholders accept the scrip merger offer, which valued Tandou (capitalised at $131 million) at 58 cents a share. Its shareholders will receive Webster shares and become a shareholder in a much bigger entity with a significantly larger market capitalisation. Webster shareholders will pick up Tandou’s significant portfolio of water entitlements and expertise in water trading: the combined entity will be diversified walnuts, cotton and water management business, with a secure water supply. Both Webster and Tandou are relatively low-yield dividend-paying stocks – Webster fully franked, Tandou unfranked – but there is no indication yet of the likely dividend policy of the combined entity.
[5]Source: Yahoo!7 Finance, 20 April 2015
Australian Dairy Farms Group (AHF)
Another dairy exposure is evolving in the form of Australia’s first ASX-listed dairy farmer, Australian Dairy Farms Group (AHF), which arrived on the stock market in October 2014. AHF’s business strategy is to aggregate dairy farms in south-west Victoria’s “golden triangle” dairy region. Capitalised at just $16 million, AHF currently owns four farms and is looking to add up to 16 more.
[6]Source: Yahoo!7 Finance, 20 April 2015
The company says it is buying at a good time, at a cyclical low in dairy farm prices, at a time when there are strong supply/demand fundamentals in milk. AHF hopes to aggregate more than 50 million litres of production by November 2016, to achieve critical mass – that figure is currently about 10.2 million litres.
At present, AHF supplies Fonterra processing facilities, but there is a range of other potential customers in its “golden triangle” region of operations. The stock could be an attractive proposition once it achieves its targeted scale, but at present it makes a loss and there is no dividend.
Select Harvests (SHV)
One of Australia’s most successful agribusinesses, Select Harvests (SHV) is Australia’s largest almond grower and processor, and has become the third-largest almond grower in the world. The group owns and manages orchards in Victoria and New South Wales and supplies consumer brands including Lucky, Sunsol and Soland.
The Australian almond industry has boomed in recent years on the back of a severe drought in California – the world’s dominant almond-producing region – as well as rising consumer demand for almonds and their health benefits.
[7]Source: Yahoo!7 Finance, 20 April 2015
SHV (which is capitalised at $580 million) has been a very strong performer for investors in recent years, with a total return (capital growth plus dividends) running at 21% a year over the last five years. The share price has moved from $3.96 to $8.18. An expected 29-cent dividend in FY15 prices SHV on an unfranked yield of 3.5%.
Murray Goulburn (not yet listed)
Australia’s largest dairy exporter, Murray Goulburn, is expected to list on the ASX later this year in a $500 million listing, after the co-operative puts to its farmer members a capital restructure proposal that includes listing a unit trust. The structure will be similar to FSF: only active milk suppliers will own voting shares in Murray Goulburn, but the trust will allow outside investors to invest in the company, and thus gain exposure to a large agri-business that generates more than half of its revenue exporting to the major markets of Asia, the Middle East and North Africa, and the Americas.
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