Small agricultural stocks WBA, TAN worthy of support

Financial journalist
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As another Australian agricultural icon in GrainCorp looks like leaving the stock market, in a takeover by US agribusiness heavyweight Archer Daniels Midland (ADM), the Australian stock market’s agricultural sector gets smaller.

GrainCorp follows ABB Grain, the former Australian Barley Board, taken over by Canadian agribusiness giant Viterra in 2009; and AWB, the former Australian Wheat Board, which was handed into Canadian ownership when bought by Agrium in 2010.

GrainCorp and its advisers did a great job – the first indicative offer, at $11.75 in October last year, was 33% above GrainCorp’s pre-bid price of $8.85.

That polite rejection helped the bid eventually reach as high as it did.

ADM will now pay $12.20 a share for the stock it doesn’t already own – it owns 15% – and investors will also receive a $1-a-share special dividend prior to the completion of the deal. RBS Morgans analyst, Belinda Moore, reckons that with tax credits, Australian shareholders of GrainCorp stand to receive about $14.13 a share if the deal proceeds.

For them, agriculture has been a good investment. But that has not always been the case.

Buying the farm

If anything, agricultural commodities – the “soft” end of the commodity basket – have an even healthier long-term demand outlook than mineral commodities like iron ore and coal, as Asia’s burgeoning middle class expands up the per-capita income scale and the protein scale. But on the stock market at least, it has been difficult to invest in agriculture, because of the variability of profit, which matches the fluctuating climatic fortunes of the underlying industry.

So where should GrainCorp shareholders put their proceeds? Moore expects much of the windfall to be redeployed in Nufarm, which she rates as an “outperform,” and her key pick in the agribusiness sector. Once GNC goes, she says, Nufarm will become the largest and most liquid agribusiness on the ASX.

Nufarm is a major global producer of crop protection products such as herbicides, fungicides and pesticides. Although it reported a first-half net profit fall of 53%, to $8.4 million, RBS Morgans has a price target of $4.98 on Nufarm – not bad for a stock trading at $4.12. Then again, Nufarm investors would want to see that kind of 20% gain, because the forecast yield is not exciting: 2.1% in FY13 and 2.9% in FY14.

However, Moore says Nufarm also warrants corporate appeal, given Sumitomo Chemical owns 23% of the company, and may wish to swallow it completely.

Moore expects further corporate activity in this sector, because the quality of Australian agriculture and its status as the “food bowl or the gateway to Asia” makes it a key area of interest for international agribusinesses.

Takeover targets

Other potential takeover targets in the agribusiness/food sector include:

Warrnambool Cheese and Butter (WCB) – Murray Goulburn (MG) recently increased its shareholding in WCB to 16.3%, while fellow dairy group Bega Cheese (BGA) also pushed its shareholding higher recently, to 17.1% – meaning that WCB is clearly in play. The attraction for these players is that WCB generates 50% of sales exporting dairy products to Asia. WCB needs any corporate action to be attractive: an estimated FY13 yield of 0.7%, rising to 3.3% in FY14, is not that exciting. (Nor is BGA on yield grounds, estimated at 2.8% this year and at the same FY14 yield for WCB.)

Ridley Corporation (RIC): Ridley is a supplier of animal nutrients, ingredients and feeds for production of food for livestock. Given Ridley no longer owns Cheetham Salt, its stockfeed business would be of interest to one of the grain companies. Recent acquisitions add to Ridley’s takeover appeal, but the stock has been a serial underperformer.

Treasury Wine Estates (TWE): With Chinese consumption of wine growing strongly each year, it is surely just a matter of time before they show corporate interest in Treasury, says Moore. Again, not a yield play: market consensus looks for a yield of 2.4% this year and 2.9% in FY14.

Incitec Pivot (IPL): IPL’s fertiliser business would have strong takeover appeal, given it is the market leader on the east coast of Australia, with a 60% market share. But Moore says upcoming gas contract renewals may scare suitors off. In the meantime, IPL’s forecast FY14 yield is 4.8%, equating to 5.8% for an SMSF in accumulation mode and 6.9% for a fund in pension phase. Goldman Sachs describes Incitec Pivot as a “quality dividend grower.”

Global food bowl

There are also some interesting stocks in the sector that are exporting farm goods.

Australian Agricultural Company (AAC): AAC is Australia´s largest cattle manager, with more than 600,000 head of cattle run on 20 properties. The company is vertically integrated, from breeding to exporting, and it has worked hard to gain premium pricing for its source-guaranteed “paddock to plate” beef. But the suspension of cattle exports to Indonesia in 2011, the resulting over-supply of cattle and the high A$ combined to send AAC into a loss in 2012.

Tasmania-based Webster (WBA) is a good little story. Through its two operating divisions, Walnuts Australia and Field Fresh Tasmania, Webster is the southern hemisphere’s largest producer of walnuts, and Australia’s largest onion grower and exporter. Webster is a counter-seasonal exporter, able to offer fresh walnuts and onions to its markets in the opposite six months to the northern hemisphere crops. As such, Webster exports its onions to 16 countries worldwide, and its walnuts to eight countries.

Broker CCZ Statton expects Webster to pay a dividend of 3.3 cents in FY14, fully franked. At a share price of 63 cents, that translates to a yield of 5.24%, or 6.4% for an SMSF in accumulation mode and 7.5% for a fund in pension phase. Webster is a great little company – it is capitalised at just $84.5 million – and has cleaned up its balance sheet in the last couple of years, to a net cash situation. But the big problem is that it hardly ever trades – the average daily trade in WBA is a scant $13,500. That makes it difficult to invest in the company.

Another small ($60 million) but dynamic rural business is the Mildura-based Tandou (TAN), which is a water, irrigated cropping (cereal and cotton) and pastoral (sheep meat) business. The stock offers investors exposure to both water assets and trading, and a broad portfolio of soft commodities in Australia. Tandou more than doubled its profit in the half-year to December 2012, and paid an unfranked interim dividend of 1 cent a share, its first payout since 2003.

Australian agriculture potentially has a very strong future, but it has not always translated well onto the share market. It is suitable for patient investors more willing to take higher-than-normal risk – and dividend income is not always part of the picture – but there are businesses that deserve investor support.

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 regards to your circumstances.

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