Australia | Mar 26 2007
By Chris Shaw
Austock Securities recently completed its fourth annual Agribusiness Conference, coming away from the event with the view its assumption of 3% growth in the medium-term is too conservative an outlook for the sector.
Driving the increase are a number of factors, including an increased demand for corn, canola and sugar as the push for biofuels continues to gather momentum, as well as ongoing stronger demand from developing countries such as India and China where the amount of available arable land is decreasing given strong urban growth.
This sets the stage in the broker’s view for an increase in both volumes and prices in the next few years, in part helped by the likely ending of the drought in Australia and the stronger demand from overseas. While there is no change to the broker’s long-term growth forecast of 3% for the industry, which is in line with expected long-term global growth rates, it sees potential upside from the demand and usage issues mentioned. On its estimates, a 1% increase in long-term growth could generate a 10-25% increase in agricultural stock, highlighting the upside potential.
The result is a lift to the broker’s expectations for the sector, though the size of the increase varies across the different industry sectors. Farm input companies such as Incitec Pivot (IPL) and Nufarm (NUF) appear best placed, the broker lifting its medium-term growth forecast for this sector to 9%, at the same time upgrading Incitec Pivot (IPL) to Buy from Hold and maintaining its Buy on Nufarm (NUF). Valuations for both stocks have also been increased, with IPL’s up 28% to $59.00 and Nufarm’s increasing by 13% to $14.00.
The increase for IPL is based on higher expected earnings, the broker lifting its FY07 profit forecast for Incitec Pivot to $137.3m from $111.8m previously and in FY08 to $143.2m from $127.5m. Earnings estimates for Nufarm are unchanged.
Grain companies also appear well placed to benefit, not only from market share gains but from cost cutting and synergies. The broker now expects growth in the sector of 5-7%, with its valuation for ABB (ABB) increasing by 15% to $11.13 and for Graincorp (GNC) by 4% to $10.98 as a result. While the broker has cut its FY07 profit forecast for ABB it has offset this somewhat with an increased FY08 estimate, while there is no change to its Graincorp earnings forecasts.
The improved industry outlook sees the broker now factoring in growth of 5-8% for distribution companies, though here some gains in terms of return on investment are needed to bring performance in line with other industry sectors. The likelihood of stronger growth going forward has seen the broker lift its valuation for AWB (AWB) by 8% to $3.70 and for Futuris (FCL) by 5% to $2.19, the latter despite minor decreases to its earnings estimates in the period FY07 to FY09. The broker’s AWB rating has been upgraded to Hold from Lighten.
Overall, the broker’s preferred exposure in the sector is ABB, which it rates as Strong Buy with a price target of $11.13. Other Buys on its list are Graincorp, Incitec Pivot, Nufarm and Timbercorp (TIM), while it rates AWB and Futuris as Holds.
In comparison, the FNArena database shows a mixed view on ABB, with one Buy and one Sell rating and an average price target of $7.55. Graincorp similarly scores one Buy and one Underperform recommendation, the average price target of $9.13 comparing to Austock’s $10.98 target.
Incitec Pivot scores three Buys, three Holds and one Sell rating with an average price target of $47.28, while Austock’s target is $59.14, up from $44.68 in line with its increased valuation. Nufarm is rated Buy twice and Hold six times with an average target of $12.05, while Austock’s revised target is $14.02, up from $12.41. Timbercorp scores one Accumulate recommendation to go with two Holds and one Sell, Austock’s target of $2.25 comparing to the average according to FNArena of $2.14.
For AWB the database shows an average price target of $2.92, with three Hold recommendations and two Sell/Avoid ratings. Austock’s target is $3.43. For Futuris it has a $2.19 target, which is lower than the average in the FNArena database of $2.24. The stock is rated as Buy and Accumulate once each, along with three Hold recommendations.