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Treasure Chest: Opportunities For Ridley Corp

Treasure Chest | Apr 26 2023


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea is on Ridley Corp.

Whose Idea Is It?

Analysts at Moelis Australia.

The Subject:

Ridley Corp ((RIC)).

By Greg Peel

Ridley produces animal feed and supplements, catering to a diverse range of industries including dairy cows, chickens, pigs, aquaculture, sheep, beef and rural and urban companions. The company’s products are designed to support animal development throughout their lifecycle, and are available for both commercial and non-commercial use cases.

Ridley produces some 2mt of animal feed and supplements annually through its national footprint, which makes Ridley one of the largest feed mill and rendering operators in Australia. Commercial products are typically sold directly to customers and delivered to their operations, while non-commercial packaged products are sold through rural retail stores, such as Elders and other independent rural retailers.

Moelis has initiated coverage of the stock with a Buy rating and $2.58 price target (last trade $2.17).

More Info:

The expansion of livestock feed mill capacity will provide both volume and market share growth opportunities, Moelis suggests. Incremental volumes will be completed at a reduced production cost per unit, which should result in operating margins expanding, allowing Ridley to lower prices and put pressure on competitor’s margins.

The implementation of improved raw material sorting and production line capabilities will enable innovation of higher value add products, which will attract higher margins and support earnings growth.

Nestle’s recent exit from the rural dog feed market (Nestle being the second largest player behind Ridley) provides Ridley with the opportunity to further expand its market leading position and increase sale volumes supporting earnings growth, Moelis notes.

Additionally, as aqua feed is produced from the same extrusion facility as the company's dog feed, Ridley has the option of increasing dog feed production without any major capex, which could enable growth into the higher margin urban dog feed market.

Moelis’ estimates imply Ridley will grow earnings per share at a 6.6% two-year compound annual growth rate, with much of the growth being within the control of management. Ridley is also continuing to improve earnings quality through bespoke and higher quality products, as well as moving into more consumer staple products (eg urban dog feed).

Ridley remains undervalued versus peers on an enterprise value multiple in the broker’s view.

FNArena database broker UBS (Buy, target $2.50) recently spoke to a bioenergy analyst at the International Energy Agency. The call focused on the outlook for biofuels production and the feedstock inputs. The topic is relevant to Ridley's Ingredients Recovery (rendering) business, which UBS estimate is in excess of 40% of earnings and has been a material growth driver since FY20 through the more than doubling in prices of tallow, an input used in biofuel production.

The expert call was highly supportive of the continued demand of biofuels and tallow, which would support the broker’s base case for high tallow pricing to be sustainable (stable, and well above three years ago).

UBS believes this base case is currently priced in by the market for Ridley, but there is some debate around the risk of mean reversion after the recent moderation in prices from very high levels late-2022.

Another broker who actively covers the company, Wilsons, has a similar price target of $2.51, backed up by an Overweight rating, which is equivalent to Buy ratings for the two brokers mentioned. Wilsons' last update occurred in the immediate aftermath of Ridley's interim result in February, with the broker stating: "Planned changes to the organisational structure and continued delivery of the Growth Plan are all designed to drive further and sustained volume growth."

Also: "Cash generation is expected to support maintenance capital, investment for growth, dividends and the continuation of the share buy-back."

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