Australia | Dec 04 2023
This story features GRAINCORP LIMITED, and other companies. For more info SHARE ANALYSIS: GNC
By Tim Boreham
Are things really that crook in the bush? While the listed agriculture sector has been battered in the last 12 months, the September-end reporting season just ended was more a picture of green shoots and resilience.
A decade ago, ag stocks were at the mercy of the weather and commodity prices in a perennial boom-and-bust cycle.
According to MPC Markets chief executive Mark Gardner, that’s not so much the case now and they have been “perhaps unfairly tarnished” because of their past sins.
“If you dig deeper into the investor presentations, [investors] might be pleasantly surprised to see the work these companies have done to smooth that risk,” Gardner writes.
“Many of the players are far from being one-dimensional. They boast diversified operations and resilient strategies, making a mockery of the simplistic old-world view of these businesses.”
The country’s biggest grain handler, GrainCorp ((GNC)) is forging ahead without its malting arm United Malt Group which demerged in 2020 and last month delisted after being taken over by France’s Malteries Soufflet.
Even without the malt, GrainCorp is diversified with interests in oilseed crushing, biofuels, animal feed and even shipping woodchips.
Of course gathering, storing and selling grain remains the foundation of GrainCorp’s business. Last year’s crop was a record for the third year running, while the current harvest is going well and the output looks to be “excellent” quality.
While GrainCorp’s full-year earnings declined -34% to $249m, broker Wilsons describes “another exceptional result highlighted by big volumes, very attractive margins and working capital release further boosting the company’s already sizeable cash surplus.”
Meanwhile, sector stalwart Elders ((ELD)) has found favour after a horrible 18 months that saw its share price halve.
The Elders empire goes well beyond its distinctive pink stores to real estate, financial services, cattle and fertiliser.
At face value, Elders’ -38% full-year profit decline to $100.8m didn’t provide much succour: the company has suffered from declining livestock and fertiliser prices, along with inflation pressures.
Readers might recall that Elders’ top cockie Mark Allison was convinced to stay on, rather than retiring as per an announcement in November last year (sending the stock down -23% in a dramatic example of key person risk).
With Elders shares surging 18% post results, investors are convinced of some more Mark magic, this time predicated on the basic stuff such as cost and cash flow controls.
The world’s ninth-biggest supplier of crop protection products such as pesticides, Nufarm ((NUF)) is hedged against geographic-specific adversities as it sells in more than 100 countries.
The northern hemisphere markets accounted for about three-quarters of the company’s crop protection earnings.
Nufarm’s full-year revenue came in at $3.48bn, with net profit creeping up 3% to $111m (albeit down an underlying -8%)
Nufarm shares have lost -22% of their value over last 12 months, but the 6% post-results bounce suggests investors should not weed this one from their portfolio just yet.
As you might have ‘herd’, Australian Agriculture Co ((AAC)) posted a -$105m half-year loss, the result of a -$175.5m write-down flowing from depressed global cattle prices.
Management promises the company is moo-ving forward, if only because of specific initiatives such as expanding feedlot capacity, dryland cropping trials and promoting premiums cuts such as wagyu to the great chefs of the world.
AAco is the country’s biggest cattle owner, with 433,000 head roaming the Top End. And – no – they don’t have individual names.
AAco celebrates its 200th corporate anniversary next year and with such a track record its survival is assured.
As far as El Nino goes, not every stock is a loser from hot and dry conditions or a winner from wet ones.
Take the country’s biggest almond producer Select Harvests ((SHV)), which posted a -$115m loss compared with a slim profit previously.
A key culprit was wet and cold conditions in its key growing areas, which meant the company produced only 19,700 tonnes of the nuts – the lowest yield in five years – compared with 28,300t previously.
Select Harvest’s operations are designed to handle 30,000t a year.
Broker Wilsons opines there were no surprises in the result, but investors still wiped an immediate -10% from the value of the stock.
Almonds are a global commodity and Select’s fortunes always have been closely tied with the fortunes of southern California, the world’s biggest almond-growing area.
The region had been affected by a bad drought, but the current crop is now expected to be rain-affected. Either way, without a kernel of doubt that implies fewer almonds and higher prices.
Meanwhile, Select’s received price in 2022-23 was $A6.22 a kilogram compared with $6.80/kg in the previous year – the lowest in five years.
Select is a hard one to nut out, pun totally intended: the current yield looks set to rebound with “strong bloom intensity”, while the bees have been doing their job as nature’s unpaid pollinators.
The company is uncomfortably highly geared, but has upgraded its “earnings improvement target” to $24-34m, from $20m.
El Nino is a positive for almond growth, although it may also elevate the price of water – and orchards soak up a lot of it.
Speaking of the aqueous stuff, water rights holder and trader Duxton Water ((D2O)) is well positioned for the Big Dry,
With 89 gigalitres of permanent rights – mainly in the southern Murray Darling Basin – Duxton is the biggest private sector water owner.
The company wheels and deals the rights, but in the main it derives revenue from renting them to farmers.
Duxton’s half year earnings fell -36% to $2.8m, but this was in the context of the wettest period in 60 years in its relevant geographies.
Conditions can turn on a dime: in October 2022 most parts of Australia had their wettest October on record, while last October was the driest in 21 years.
Despite dealing in one of nature’s biggest variables, Duxton’s revenues are surprisingly predictable and the company has promised a franked dividends of 7.3c over the next 12 months, implying a yield of around 4.7%
With demand for the rights likely only to increase given the expansion of orchards over temporary crops, Duxton is a stock unlikely to go to water.
This story does not constitute financial product advice. You should consider obtaining independent financial advice before making any financial decisions.
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For more info SHARE ANALYSIS: AAC - AUSTRALIAN AGRICULTURAL COMPANY LIMITED
For more info SHARE ANALYSIS: D2O - DUXTON WATER LIMITED
For more info SHARE ANALYSIS: ELD - ELDERS LIMITED
For more info SHARE ANALYSIS: GNC - GRAINCORP LIMITED
For more info SHARE ANALYSIS: NUF - NUFARM LIMITED
For more info SHARE ANALYSIS: SHV - SELECT HARVESTS LIMITED