Healthy Outlook For Wellard Live Cattle Exports

This story features WELLARD LIMITED. For more info SHARE ANALYSIS: WLD

-Defects, delays to vessels in H1
-Live export markets being opened up 
-Need to establish track record to re-rate
 

By Eva Brocklehurst

Livestock exporter Wellard ((WLD)) has disappointed brokers, with its first half results affected by restructuring to a public company, manufacturing issues for two of its vessels, and IPO-related costs. A strong US dollar also affected depreciation and interest expenses on translation.

Still, revenue was in line and the live cattle market remains buoyant. The company has executed its agreement with China's Wellao JV and the design of the feedlot facility has now been completed, with construction to start in the June quarter. The company is also looking at new markets in Turkey and Israel.

Full year earnings guidance is reduced to $42.5m from $46.4m. While this downgrade is disappointing, Deutsche Bank, reducing its forecasts by 3-9%, concedes it reflects the short term impact from a delay in commissioning of the ocean going Shearer vessel and repair costs and outages for the Swagman and Outback vessels, which are expected to return to the fleet this month.

The broker’s Buy rating is supported by increasing capacity and consumption of beef, lamb and dairy in Asia and, of note, the stock is trading at a 48% discount to an average of Australian agricultural peers on FY17 earnings estimates. The second half is expected to be better, although it will be subject to seasonal conditions in animal sourcing areas.

Indonesia import quotas appear positive in the first quarter of 2016, although Deutsche Bank notes some confusion as to whether the quota is three or four months in duration and, while not the desired annual outcome, the increase provides more certainty for graziers.

The broker believes it is too early to determine the impact of Indonesia’s new tax on the import of non-productive cattle but the additional uncertainty has potential to disrupt demand in the short term as butchers may defer purchases to protest the new tax, as has occurred in the past.

Meanwhile, the company expects the cattle price to continue to ease and cattle availability improve, as recent rainfall in Queensland and the Northern Territory was not sufficient to withhold stock.

The company is also looking to diversify supply to Brazil, Uruguay and Colombia and expects to establish live export protocols with Colombia and Vietnam. The new Kelpie vessel design has been completed and construction should start shortly with commissioning in FY18.

Morgans acknowledges the earnings downgrade is based on factors such as vessel repair – a manufacturing defect and not a maintenance issue from Wellard's end – which are short term. However, the broker asserts the delay in Shearer's commissioning – blamed on labour supply – should have been accounted for in prior guidance.

Over coming years the stock offers a strong earnings growth profile from its exposure to favourable industry dynamics but, as the stock has disappointed since listing, the broker suspects it will take some time to re-rate and needs to deliver on its forecasts and growth projects.

Earnings are skewed to the second half because of the timing of Asian religious festivals and the broker suspects this skew could be greater than usual this time. The company did not declare an interim dividend, intending to declare one at the full year result, with directors targeting the upper end of the 30-50% pay-out range. Morgans assumes the dividends are 50% franked, given Wellard pays minimal tax.

Wellard formed from WGH Holdings, purchasing some but not all assets of that private company, making comparisons to the past difficult. Key risks to forecasts, Morgans believes, centre on further delays in the commissioning of Shearer and the implementation of the live export protocol with Columbia and Vietnam, given Wellard has budgeted on one shipment in FY16.

Nevertheless, the broker expects strong profit growth to ensue based on healthy demand, a lower Australian dollar and oil price, and the ability to capture more margin from sourcing cattle directly. The exporting margin has been affected by a scarcity of cattle in northern Australia, which UBS suspects eliminated the benefits of lower fuel costs in the half.

The broker remains confident that the company can compete against export-focused Australian abattoirs but margins may not recover in the near term. While processed exports have a stocking density benefit versus live exports this is more than outweighed by lower feed and processing costs and higher revenue under a live export model.

The broker notes the industry commentary that there is a potential for live exports to China to be 1m versus the 1.3m in global exports from Australia in FY15. The feedlot in China should be commenced in June with first shipment expected in September. UBS forecasts a ramp up to 150,000 head of cattle exported by FY19, with further upside potential beyond this date.

Wellard currently accounts for 27% of Australian live cattle exports, operating four vessels with another two under construction. FNArena's database shows three Buy ratings. The consensus target is $1.50, suggesting 78.6% upside to the last share price. Targets range from $1.40 (UBS) to $1.65 (Deutsche Bank). The dividend yield on FY16 forecasts is 3.1% and 6.4% on FY17 estimates.
 

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