Australia | Oct 27 2006
By Chris Shaw
Australia’s drought is playing havoc with the share prices of rural companies, with both Futuris (FCL) and AWB (AWB) falling in recent sessions as the earnings impact of the dry conditions is factored into valuations.
Another company to face such a fate in recent weeks is Warrnambool Cheese and Butter Factory Company (WCB), which aside from having possibly the longest name of any listed company in the world is also suffering as the drought plays havoc with the Australian milk market, of which it represents just over 8%.
The stock is trading around $3.40, which while up from recent lows of around $3.00 remains well down from its year high of $3.95 on concerns the risk to earnings from its milk operations are to the downside in coming months.
Austock Securities, which rates the stock as Buy with a price target of $4.00, suggests a flat earnings result for the year is expected though analyst Paul Jensz points out the actual result could easily be half that if the milk market faces irrational price behaviour.
Such an outcome remains possible as on the broker’s and Dairy Australia figures northern Victoria could experience a fall in milk supply of as much as 20% this year and south-west Victoria a decline of 3%, while nationally there is expected to be a 7% fall.
This is a reflection of the drought conditions as the lack of rain not only lowers primary production levels but also causes higher grain prices, which is a negative for supply as it reduces the level of secondary feeding farmers undertake.
At the same time the difficult conditions mean milk price rises are below what would normally be expected, the broker noting the average price increase so far this financial year has been 2% to 28c per litre. This is below its forecast of a 3% increase, highlighting the potential for earnings to fall short of expectations.
Looking longer-term the broker expects earnings to recover as weather conditions return to normal, so it sees profit increasing in FY08 to around $13m. A possible positive for short-term sentiment in the broker’s view is the likely sale of competitor Tatura, which it suggests could see the company re-rated depending on the price achieved.
The broker values the stock at $4.56, with long-term potential also coming from higher exports to markets such as Japan and Singapore, while recent upgrades to production facilities mean costs should come down at processing capacity and flexibility increases.
With a market capitalisation of only around $130m Warrnambool shares receive little coverage by major brokers and the stock is thinly traded. As evidence of this there have been no trades today, the stock currently quoted as $2.35 buyer and $3.40 seller.