Australia | May 14 2007
By Chris Shaw
Canada’s Saskatchewan Wheat Pool has won market approval for its takeover offer for Agricore United, a move that will signal a consolidation of the Canadian grain market into two players from its current three. “So what?” may be the initial reaction of most Australian investors, but as Austock Securities points out there are implications for the Australian grain companies in the move.
The broker sees two catalysts as the likely drivers of change in the Australian market, the first being for the groups to convert to a single class of share. While having two classes of shares made sense when the co-ops were transformed into public companies as growers were better represented it now makes little sense as the companies are growing and looking to attract additional capital, which is harder in a more complicated structure such as having two separate classes of stock.
Similar moves have already occurred in the Canadian market, with Saskatchewan Wheat Pool making the change in 2005 and enjoying a re-rating by the market in the period following the decision to maintain just a single class of share.
While such a move is by no means certain for the Australian listed grain stocks the broker suggests there is as much as an 80% chance ABB Grain (ABB) moves to a single class of share sometime this year, a 50% chance Graincorp (GNC) follows suit sometime next year and up to a 30% chance AWB (AWB) does the same.
The second catalyst domestically in its view is deregulation of the sector, though the broker acknowledges the timing of any such change is being pushed out as previously it had rated such a move an 80% chance prior to the upcoming Federal election but has since adjusted this to 20%.
Looking out a bit further the broker still sees such a move as inevitable, estimating by this time next year as much as 20% of Australia’s wheat harvest will be marketed by non-AWB participants, rising to as much as 50% of the harvest by FY09.
Given this outlook the broker has maintained its positive view on both ABB (ABB), which it rates as a Strong Buy, and Graincorp (GNC), which it rates as Buy. Its price target on the former is $11.13, which puts the broker squarely at the aggressive end given the FNArena database shows an average target of $7.55, based on one Buy and one Underperform rating.
With respect to Graincorp the broker is again above market as represented by the database, as its target of $10.98 compares to an average target of $9.12 and one Buy and one Underperform rating.
Austock is not so positive on AWB (AWB) as it rates the stock as a Lighten, expressing concerns it may take some time to change the company’s culture. The broker has a target of $3.43 against an average according to the FNArena database of $2.92, with three Neutral ratings and two Sells.
Shares in both ABB and Graincorp are lower today, as at 3.30pm ABB was down 2c at $8.05 and Graincorp was down 18c at $10.12. AWB stock was unchanged at $3.42.