Tag Archives: Agriculture

article 3 months old

Weekly Broker Wrap: Housing, Gaming, Retail, Media, Fertilisers And Energy

-Will housing boom lead to bad debts?
-Risks rising for Hong/Kong Macau gaming
-Changes loom for operating leases
-Possible SXL merger accretive to NEC?
-High US dollar headwind for potash
-QCLNG shows CSG to LNG success
 

By Eva Brocklehurst

Housing Boom

The housing boom in Australia and New Zealand is entrenched, with dwelling prices now up 57% in Sydney, 42% in Melbourne and 63% in Auckland from pre-global financial crisis levels in 2007. Sydney median dwelling prices are now 10.3 times median household disposable income, with Melbourne at 8.2 times and Auckland at 9.8 times. UBS observe increasing evidence house price inflation is being fuelled by speculative activity.

Given low rental yields are unlikely to cover interest payments and ongoing expenses, the economics of these housing purchases for investment rely on an assumption of full occupancy, favourable tax treatment and ongoing appreciation in house prices. UBS observes the Reserve Bank appears less concerned about house price rises because they are primarily isolated to Sydney and Melbourne.

If house price multiples continue to expand there are implications for not only bank mortgage books but other parts of the economy. New loans written against expensive housing assets may deliver poorer credit outcomes in the event of an economic downturn. UBS suspects further supervisory intervention is inevitable in the current scenario. Elevated bad debts for the mortgage banks will become more likely in the event of a future economic shock, in the broker's view.

Gaming

Morgan Stanley remains cautious about the Hong Kong/Macau gaming industry because of regulatory pressures, oversupply and negative earnings revisions, along with rich valuations. If there is a short term rally on the back of the opening of Galaxy the broker recommends selling into the rally. Sequential improvement in fourth quarter revenue may not be enough to drive outperformance since higher-than-expected operating expenses and lower-than-expected demand mean earnings revisions are yet to find a base. The broker remains concerned about recent data on hotel room rates and occupancy in Macau. Moreover the policy risks are numerous and point to a slower recovery in demand.

Retail

There are implications for retailers from the treatment of operating leases, as the International Accounting Standards Board proposal to bring operating leases onto balance sheets appears to be progressing towards inclusion in the new standards. New standards typically require implementation within one to two years. The proposal has met widespread opposition from the retail industry. Instead of recognising rental payments as incurred, retailers will be required to expense theoretical depreciation and financing costs. This will result in higher earnings at the EBITDA level but also higher interest and depreciation charges.

Morgan Stanley notes, theoretically, there should be no impact on valuation for retail stocks as the changes have no direct effect on cash flow. Nevertheless, leverage, returns on capital expenditure calculations, and trading multiples will be affected. At this stage the broker does not have the information to identify winners and losers or as to how tax authorities will treat the changes.

Media

Deutsche Bank has looked at the potential of a merger between Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)), given the continued speculation. Southern Cross is not currently Nine's regional TV affiliate and an acquisition of WIN TV would likely to be easier to implement, but the broker's analysis demonstrates that acquisition of Southern Cross could be highly accretive to Nine shareholders.

The base case scenario suggests earnings accretion of 10-20% over the first two years following a transaction. The driver would be the substantial revenue synergy potential, as Southern Cross moves to broadcast Nine's content in place of its Ten Network ((TEN)) broadcast in regional areas where Nine doe not directly operate. Additionally, the sale of Nine Live puts Nine Entertainment in a favourable negotiating position as it can now offer a significant cash component for Southern Cross stock. Deutsche Bank attributes Southern Cross's lower trading multiple to its higher level of gearing but, if the merged entity maintains a more reasonable gearing ratio, this discount is unlikely to persist.

The latest online rating figures for March from Nielsen suggest there is no let up in the consumer engagement for REA Goup ((REA)), Carsales.com ((CAR)) and Seek ((SEK)) in domestic markets, despite the presence of challengers. The real estate segment highlights the strength in the property market with a material step-up in audience and no change to REA dominance. Automotive enquiry volumes improved and while Carsales.com is dominant, Gumtree is encroaching. Seek benefitted from a bounce in employment volumes and improved key usage metrics, but Citi notes Indeed and LinkedIn are expanding in the category.

Fertilisers

Citi considers the outlook for nitrogen, phosphate and potash is weak. Ample supply, a strong US dollar and the potential for adverse weather to limit the planting of corn in the US is the reason. During a late spring season in the US the farmer tend to apply more urea and less ammonia, and skip potash and phosphate applications. Supply pressures are continuing to affect urea in the broker's view but lower exports from China may help stabilise prices later in the year. The analysts note the stronger US dollar is a headwind for potash, particularly in India and South East Asia, where potash imports are used on some crops that are not exported.

Australian Energy

The performance of QCLNG, the first project in the world to liquefy gas from CSG fields for export as LNG, has rivetted the attention of energy market participants. The central Queensland project entered production late in 2014. A second train will be filled towards the end of this year. Morgan Stanley notes industry participants are watching with interest given the relevance of this project for others such as GLNG and APLNG, both of which are expected to start production mid year. The production performance of QCLNG is considered a positive read through for Santos' ((STO)) GLNG and Origin Energy's ((ORG)) APLNG and illustrates that successful conversion of CSG to LNG can be achieved.
 

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Material Matters: Mineral Sands, Iron Ore, Steel, Oil, Nickel And Agriculture

-Macquarie cuts mineral sands forecasts
-Chinese iron ore commands premium
-Interest in oil M&A re-ignited
-CS prefers mid cap nickel miners
-Near-term outlook positive for Oz agri stocks
 

By Eva Brocklehurst

Mineral Sands

Macquarie has reviewed mineral sands pricing forecasts. Subdued demand is evident, particularly from China. This is weighing on most commodities and while supply discipline for zircon has kept prices buoyant, the broker believes over-capacity will suppress material price increases as demand recovers. In titanium dioxide there is a brighter outlook for high-grade chloride feedstock but Macquarie still makes significant cuts to forecasts. Rutile price forecasts are reduced by 15-20% over the next five years and ilmenite by 20-40%.

On the back of the changes to the outlook for mineral sands Macquarie downgrades Iluka Resources ((ILU)) to Underperform from Outperform. The broker maintains a Neutral rating for the other large mineral sands producer, Rio Tinto ((RIO)), but reduces cash flow expectations for the next few years, observing that Rio Tinto's progressive dividend is now only just covered by free cash flow in 2015 and 2016.

Iron Ore

China plans to cut power prices and iron ore resource taxes. Macquarie does not believe the tax reductions will be too significant as current iron ore prices are probably not low enough to drive further displacement of domestic iron ore. The mechanism China operates for its iron ore resource tax is complicated but, based on conversations the broker has had with miners over the last six months, there is unlikely to be any meaningful sequential impact. Local governments have already been offering reduced tax rates to miners and the broker believes the policy could be interpreted as the central government formalising a policy already in place.

Other costs to miners are coming down too, such as falling diesel prices and lower consumables prices as well as, potentially, a reduction in power prices. Macquarie notes, despite the cuts to costs in China, it was not enough to keep pace with price falls. As a result, a significant proportion of Chinese iron ore mining capacity has left the market. Still, the broker assesses there is around 190mtpa of domestic ore being consumed and, at current prices, with the the relatively small cost reductions most of China's cost curve is under water. Why the remaining mines are hanging on is that domestic ore prices are commanding a premium to imported ore.

Several reasons are proffered for this premium. Macquarie notes lead times on domestic iron ore are much shorter than for imported tonnage and therefore there is much less price risk involved in ordering a cargo. Domestic ore can also be purchased in smaller parcels. Moreover, the broker suspects there could be some scarcity premium being built into the market. Mills typically use domestic concentrates for pellets. The final reason relates to financing as mills can be much "looser" with payments to domestic miners.

Steel

Weakness in Chinese steel output is continuing. The latest data for late March reveals member mills of the China Iron and Steel Association are producing at the lowest level since January 2013 and Macquarie observes this is 10% below levels seen at the start of the year. Moreover, mill inventory rose further, which suggests very weak sales volumes that are 12% below the equivalent period in 2014.

Oil

UBS is raising 2015 Brent forecasts to US$56.25/bbl from US$52.50/bbl. The revised estimates reflect modestly higher-than-forecast first quarter prices and only minor revisions to supply/demand forecasts. 2016 oil price forecasts are unchanged. In tandem the broker has also reduced long-term Australian dollar assumptions to US75c from US80c, which has a more material impact on valuations of key oil stocks.

UBS moves Oil Search ((OSH)) to a Buy from Neutral after recent share price weakness and retains Santos ((STO)) as a top pick among large caps, thanks to its future positive free cash flow yield in a recovering oil price environment. Australian dollar reporting companies such as Santos, Beach Energy ((BPT)) and Drillsearch ((DLS)) should have some protection from the falling Australian dollar. The broker upgrades Tap Oil ((TAP)) to Neutral from Sell after a 42% fall in its share price since the start of the year.

The broker considers Shell's bid for BG has re-ignited M&A interest in the sector but discounts the large cap stocks as target, although consolidation among smaller players is anticipated.

Mid Cap Nickel Miners

Credit Suisse has become more optimistic on base metals and prefers the mid cap nickel miners to the large cap iron ore players. However, given a nickel floor price defined by nickel pig iron (NPI), the availability of the Philippines ore to sustain 350,000t of NPI output and modest deficits forecast from 2016 the broker does not expect large price rises. Credit Suisse looks for nickel to recover to US$8.50/lb rather than the previous forecast of US$9.50/lb for FY16-17. The broker does not expect prices will become "supercharged" and encourage more high-cost supply.

Higher cash flows and recent share price underperformance also mean the broker upgrades nickel miner Sirius Resources ((SIR)) to Outperform from Underperform. Western Areas ((WSA)) retains an Outperform rating. Higher Australian dollar-denominated nickel prices helps increase the cash flow of operating mines. Multi-metal miner Independence Group ((IGO)) is upgraded to Outperform from Neutral as the biggest beneficiary of the broker's revised price deck which includes unchanged gold price forecasts, accompanied by a lower Australian dollar.

Agriculture

Bell Potter observes Australian agricultural stocks have some of the best leverage to a falling Australian dollar, especially farming operations which typically have a high proportion of Australian dollar costs and and US dollar selling prices, The broker has downwardly revised Australian dollar forecasts to US75c for FY16 and US77.5c for FY17. Webster ((WBA)) and GrainCorp ((GNC)) have the most direct leverage.

Rural confidence is now at the highest level for three years and the near-term outlook for winter sowing is for above-average rainfall. Bell Potter considers this a material profit period for merchandise operators such as Elders ((ELD)) and Ruralco ((RHL)).

Meanwhile, dry conditions in California suggest almonds, walnuts, dairy and wine grapes are the commodities most likely to be impacted, with the state representing in excess of 3.0% of global supply in these commodities. The broker likes Webster, Australian Dairy Farms ((AHF)) and Bega Cheese ((BGA)) as exposures to this thematic.
 

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Weekly Broker Wrap: Media, A-REITs, Life Insurance, Tourism And Food

-Digital media to outperform
-Bell Potter upgrades My Net Fone
-Impact of closing some MYR stores
-Implications from Trowbridge report
-Inbound tourists staying longer
-Oz food companies perform strongly
 

By Eva Brocklehurst

Media

Morgan Stanley acknowledges a conundrum in its media coverage. The broker has never been more bearish on the medium term outlook for newspaper, TV and radio earnings and asset values yet it is upgrading the industry view to Attractive from Cautious. The reason is the composition of the stocks under cover have changed dramatically. In 2008 traditional media accounted for 90% of the value in the broker's coverage. Today, that has declined to 40% and internet and digital assets account for 60%. Looking forward, in aggregate, the broker expects the sector will outgrow and outperform the broader Australian market. Hence the relative Attractive rating.

Morgan Stanley's order of preference in internet/digital media is Seek ((SEK)), REA Group ((REA)) and Carsales.com ((CAR)). Among traditional media the broker's highest conviction Overweight stocks are market share winners such as Nine Entertainment ((NEC)) and APN Outdoor ((APO)) and those with undervalued turnaround potential such as Fairfax Media ((FXJ)) and APN News & Media ((APN)).

My Net Fone

My Net Fone ((MNF)) has acquired the global wholesale voice business of Telecom NZ ((TEL)) for consideration of NZ$22.4m to be initially funded with a $25m bank facility. The acquisition is forecast to generate revenue in FY16 of $90-100m and earnings of $3.5m before synergies. Revenue synergies are largely expected from providing wholesale managed services and software products to Telecom NZ International customers.

Included in the revenue forecast is a 3-year exclusive trading agreement with Spark New Zealand for international minutes, which the company estimates will generate annual revenue of around $10m. Bell Potter upgrades FY16 and FY17 estimates by 4.0% and 11% respectively on the back of the acquisitions but downgrades FY15 by 2.0%, largely because of acquisition costs. The broker increases the MNF price target to $4.00 from $3.00 and upgrades its recommendation to Buy from Hold.

Myer and A-REITs

Macquarie has looked at the implications for Australian Real Estate Investment Trusts (A-REITs) of closing underperforming Myer ((MYR)) stores. To date Myer has typically been handing back space at lower quality malls at the expiry of leases, rather than breaking leases early. Macquarie suspects, with a weighted average lease expiry of 15 years or so for the network, this will likely remain a slow burn for retail A-REITs. International retailers may spur a forecast 215,000 square metres in incremental demand in Australia but this will be centred on CBDs and high quality regional malls, which makes the redevelopment of lower quality centres post any Myer departure problematic, in the broker's view.

Any departure by Myer may be positive on the rent front but the capex outlay required to refit the space is more often value destructive for the retail landlords, Macquarie contends. An example is Dandenong, where JB Hi-Fi ((JBH)), Aldi, Daiso and Trade Secret took part of the old Myer space but factoring the $30m development cost, it was destructive to net present value. The broker considers the impact of any Myer departure on the existing discretionary retailers in the centres is negative as well. Hence, coupled with a general expectation for modest earnings and distribution growth for certain retail landlords, Macquarie remains Underweight on the retail A-REIT segment.

Life Insurance

The government is ramping up the pressure on the life insurance industry to adopt the recommendations of the Trowbridge report. The federal assistant treasurer, Josh Frydenberg, has said the extent to which government intervention is required will depend ultimately on the industry's own actions. The most significant concern is the upfront commission model which has misaligned the interests of insurers, advisers and clients, creating significant churn. JP Morgan considers the assistant treasurer's words a threat to the planning industry and life insurers. 

JP Morgan expects that if the remuneration measures outlined in the report are adopted, it would likely release capital in the industry and lead to improving returns if margins were not competed away. The broker also observes there has not been any strong response from the Financial Services Council, a co-sponsor of the report, although it appears to tacitly support the report. The Association of Financial Advisors, which also co-sponsored, has not supported the findings in the current form. JP Morgan believes there is still some way to go but addressing churn in the industry would be a positive for listed life insurers such as AMP ((AMP)) and Clearview Wealth ((CVW)).

Tourism

Are tourists responding to the weaker Australia dollar? That's the question ANZ analysts ask as the mining boom peters out. The analysts note statistics which show a weaker Australian dollar is encouraging more overseas visitors and they are staying longer and spending more. There were record visitor numbers from 15 key markets last year with China leading the way. Despite the increased cost of international holidays, the number of Australians travelling abroad remains strong. Domestic tourism is also robust, but underpinned by business travel and visits to family and friends. Hence, the analysts suggest the economy will gain most from incoming tourist arrivals and these should continue to strengthen, assisted by further falls in the currency and stronger economic growth in key offshore markets.

Food

Canaccord Genuity Australia has reviewed a number of factors which are driving the strong performance of ASX-listed food and agricultural companies. Domestic and global population growth, specifically the expansion of the Asian middle classes, and a subsequent increase in demand from Asia for Australian agricultural exports are supportive. The lower Australian dollar will also drive increased competitiveness in exports. Australia has a reliable history in the sector and strong "clean and green" credentials, which should continue to play out favourably, in the analysts' view. There is also increased focus and fund allocation to these stocks from investment managers.

The five companies covered by Canaccord Genuity within this area have delivered mean returns of 104.5% from the time of the broker's initiation on the stock (three years or less). Coverage to date includes dairy companies such as Bega Cheese (BGA)) and Warrnambool Cheese & Butter ((WCB)), sandalwood oil producer TFS Corp ((TFC)), almond producer Select Harvests ((SHV)) and honey producer Capilano ((CZZ)).
 

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article 3 months old

Nufarm Needs More Evidence To Justify Rally

-New products to the fore
-Recovery in North America
-Oz winter key to second half
-Cost benefits largely factored in
 

By Eva Brocklehurst

Nufarm's ((NUF)) stock has been boosted recently as a result of several factors but brokers remain cautious, viewing the equity as fair value given its exposure to the vagaries of weather and soft commodity prices. 

One aspect which keeps Credit Suisse upbeat is that the company is entering the commercialisation phase of numerous, high margin new products, such as fungicides in Europe. Nufarm is targeting sales and gross margin expansion over the next three to five years and the broker suspects 30% gross margins could be achievable by FY20 with an improved mix of product, up from 26.5% in FY14.

To achieve this, significant optimisation of R&D, sales and marketing is required. Credit Suisse observes Nufarm spends less than its competitors Adama and Cheminova in this area. While acknowledging the importance of marketing and R&D in driving sales and margins, the company believes it has surplus activity that can be rationalised to provide better expenditure outcomes.

The broker is not yet confident enough to project cost savings to the bottom line. Nufarm has indicated any re-investment strategy will be gradual, that is, executing on cost savings and then evaluating re-investment options. The broker also observes the relationship with major shareholder Sumitomo, which has a 23% stake, continues to deepen. Recent distribution agreements bring the total sales of Sumitomo products to just under $100m.

Earnings are heavily skewed to the second half but JP Morgan takes heart in management's confidence it can generate improved profitability over FY15. Seeds are the weakest performing segment, delivering a loss in the first half. Management still expects growth in seeds in FY15 but is more modest about its targets. The broker recalls an "ambition" to double 2012 earnings within 3-4 years (disclosed in 2013). This now seems to be a more distant goal.

In North America the company is hopeful of an earnings recovery, driven by a more normal spring in the US. In Brazil the second corn planting is down 10%, which will affect demand for crop protection. In Europe as in Australia, given normal seasonal conditions, the second half is expected to be slightly stronger.

The market has moved quickly to factor in the positives from cost cutting but proof of delivery will be required to justify any upside from here, in Macquarie's view. The broker believes the company is on the right track, with improved balance sheet metrics and focus. Still, seasonal conditions will be important to monitor in coming months. On the subject of weather conditions, rain has been more favourable since the first half but the key winter rainfall period in Australia is from April to June so that feature is still to play out. At this stage, conditions are more favourable in eastern Australia than in Western Australia.

South America remains a strong performer, Macquarie notes, with margins up strongly in Brazil, driven by better product mix and strong demand for the company's differentiated offerings. Seeds were the main disappointment, because of weak seasonal conditions, competition in China and some product timing issues. Macquarie believes the broader margin and earnings upside opportunity remains attractive.

UBS also considers the stock fair value and found some quality issues in the first half result. While some PE multiple re-rating is warranted, given the focus on growing cash flow, UBS believes the stock price now incorporates some of the targeted cost reduction benefits outlined by Nufarm. The broker wants more detail around strategic initiatives and evidence of successful execution in order to factor in further outperformance.

Deutsche Bank was not so impressed and believes the first half results to be a negative for the share price. The broker does not consider the outlook commentary sufficiently upbeat to sustain the recent rally in the share price. The result was boosted by FX gains and lower R&D expense while net operating cash flow was weaker than forecast. Deutsche Bank downgrades to Sell from Hold. The broker considers the market is pricing in the full extent of the $116m cost reduction program and potential corporate activity but remains wary about the recent decline in soft commodity prices.

After strong share price appreciation Morgans also downgrades, to Hold from Add, but remains a buyer on any material weakness. The broker was pleasantly surprised by the first half result, minus seeds, given the hot, dry Australasian summer, noting that North America had returned to profitability and the South American result was solid. Europe also performed better than Morgans expected. The first half result is not enough to justify the recent rally but, taking a medium term view, the broker believes there is further upside if Nufarm delivers on its targets. Morgans would be a buyer below $6.50.

FNArena's database shows no Buy ratings. There are four Hold and two Sell. The consensus target is $6.78, which compares with $5.86 ahead of the first half result and signals 4.4% upside to the last share price. Targets range from $6.05 (Deutsche Bank) to $7.20 (Morgans).
 

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Treasure Chest: Capilano Delivers Sweet Surprise

The story thus far

Shares in Capilano Honey ((CZZ)) have been on an absolute tear since late 2013 as investors took notice of the fact that Australia has a listed honey producer and marketer, with strong growth prospects. Over the period the share price has lifted from below $3 to surpassing $8.75 this week.

This week's results

Capilano's interim result revealed a jump in earnings per share of no less than 75% to 42c, carried by more sales, more cost volume benefits and higher product margins.

What's Next?

Canaccord Genuity, one of only few stockbrokerages actively covering the stock, was pretty much blown away by the strength on display. The analysts believe there's more on the horizon. They have lifted estimates by double digits (20%+), reiterated their Buy rating and lifted their twelve month price target to $10.18 from $8.79. This suggests there's still plenty of upside, despite the stellar run to date.

Capilano shares yesterday closed at $8.70. On current estimates the company will pay out 37c this year (FY15) and 42c next (FY16) implying dividend yields of 4.3% and 4.8% respectively. Last year's dividends paid were fully franked.
 

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article 3 months old

Sweet Success For Capilano

-Diversifying sources
-Focus on higher-value end
-Maintains retail price, margin
 

By Eva Brocklehurst

Capilano Honey ((CZZ)) has made inroads into market share, with a 27% increase in revenue and profit in the four months to October already exceeding the first half of FY14. The company's dominant market share and diversified supply chain is expected to underpin FY15 earnings, as it expands its range of brands and improves its debt position.

Canaccord Genuity's earnings outlook for the stock in FY15 has been upgraded by 20.3% on the back of positive AGM commentary. Canaccord's price target is increased by 15.3% to $8.79' suggesting the potential for 31% upside. Needless to say, a Buy rating is in place. Capilano has indicated its market share has jumped to 67.8% from 55.2% a year ago. This gain has been at the expense of competitors, including private labels, which have dropped market share to 14.0% from 19.8%.

While a supply shortage means the company may not retain all the recently acquired share, the broker considers a structural change has occurred and Capilano is more strongly positioned, and able to provide continuity of supply. Dry conditions in NSW and Queensland may constrain a full rebound in Australian honey volumes over the next few months but the company has been able to source honey from overseas, supplementing domestic honey with blends.

The company is pursuing its premium product categories, such as manuka honey, and looking to increase premium exports to China for which there is strong demand. Brands such as Allowrie and Smiths have been expanded to maintain a key presence on supermarket shelves. Growth is being reinforced by higher margins associated with higher-value branded honey, supplemented by the blended products.

FY14 was a challenging year for Australia's honey industry but Capilano has been able to push through honey price increases at a retail level and maintain margins. Canaccord Genuity is forecasting profit growth of 52.0% in FY15, reducing it to growth of 13.1% for FY16 forecasts. Although a resumption of supply will enable competitors to reclaim some market share, the broker believes the company's ability to offer bee keepers market-leading prices for honey, as well as provide support to the industry via technical advice and an on-the-ground presence, will position Capilano favourably in competition with private label producers. 

Key risks include adverse changes to trading terms by the two major supermarkets, including discounting which leads to margin reduction. Honey production is also very affected by agricultural factors, such as weather, bushfires and poor pollination, which reduces supply. Capilano is the largest packer and marketer of honey in Australia, having grown from an original co-operative. The company derives 75% of its revenue from Australia with 25% from exports.
 

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article 3 months old

Select Harvests Readies For Substantial Growth

-Almond prices still firming
-US supply constraints continue
-Susceptible to AUD/USD variance
 

By Eva Brocklehurst

The US crop of almonds appears, on Bell Potter's calculations, to be around 10% short of current US Department of Agriculture forecasts, with reports the harvest of the main Nonpareil variety in California is down 15%. As the harvest proceeds, prices are firming and this should encourage Select Harvests ((SHV)) as it sells forward its crop from December.

The company's earnings are very sensitive to almond prices and the Australian currency, with a 10% change in each resulting in a 15-20% change in Bell Potter's FY15 earnings estimates. The broker has adjusted forecast to reflect the company's recent land bank acquisitions and its capital raising. Select Harvests has furthered its investment in planted acreage and new orchard development. In aggregate these acquisitions suggest to Bell Potter production could grow over the next three years by 13-16%, with a doubling from FY14 levels when the orchards mature in 2024-25. The initial orchard investment is now 100% equity funded and, on a stand alone basis, is 5-10% earnings dilutive in FY15-18. The equity dilution is greater than the initial earnings uplift.

Bell Potter has raised Select Harvests' FY15 almond price estimates to $8.42/kg from $8.15/kg but the diluting impact of the equity raising means the net effect is a downgrade to earnings per share of 2.6% in FY15 and 7.2% in FY16. The broker's target lifts to $5.97 from $5.08, reflecting an uplift in valuation for company-owned orchards and an assumption that a funding agreement for the orchard developments can be reach.

WilsonHTM's positive outlook is underpinned by expectations of substantial production growth and the recent acquisitions. A downgrade to earnings per share, by 1.9% in FY15 and 3.0% in FY16, reflects the dilution of higher-than-expected participation in the recent share purchase plan. Proceeds of $19.7m were confirmed from the Share Purchase Plan, against the broker's forecast of $5m. In combination with the recent placement this raises a total of $66m. WilsonHTM's target of $6.97, reduced from $7.11, reflects a 5% discount to valuation to allow for the execution risk in the orchard development program. The broker retains a Buy rating, expecting strong consumption growth and supply constraints will support attractive pricing in the medium term. 

Bell Potter has reservations around the long-term sustainability of US dollar almond prices and the potential impact on Select Harvests, given it is one of the most sensitive exposures to the Australian/US dollar in the agricultural sector. The broker prefers a Hold rating, envisaging near-term earnings have a bias to the upside, despite the longer term concerns.

See also, Select Harvests Rolling In Clover on September 4 2014.
 

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article 3 months old

Nufarm Turnaround Harvests Praise, More Upside Likely

-Earnings improvement likely
-Risk in softs pricing, weather
-Further re-rating possible
 

By Eva Brocklehurst

Nufarm ((NUF)) met the debt and working capital goals it set for FY14, sparking several ratings upgrades from brokers. Management is given credit for strengthening the balance sheet position and cash flow is expected to continue to improve. Moreover, Nufarm is confident that debt and working capital can be reduced further over the next two years. NUF shares have rallied strongly in the wake of the FY14 result, but many brokers expect there could be more upside to come.

The time is right to take another look at the stock, in CIMB's opinion as if the seasons deliver, material earnings improvement is likely. The broker raises FY15 and FY16 forecasts and calculates that delivering on management's figures, the next two years could release $200m. Credit Suisse calculates the company could generate enough free cash by FY16 to lift its dividend to a yield of 6%. On FNArena's database consensus estimates put the FY16 dividend yield at 2.8% currently. Credit Suisse upgrades to Outperform from Neutral, but remains wary that soft commodity prices could reduce FY16 plantings or squeeze output pricing for crop chemicals.

Deutsche Bank is also wary of the decline in soft commodity prices but expects Nufarm's earnings will improve in FY15, given a return to more normal seasonal conditions in North America and Australia. North American earnings in FY14 were well below the broker's forecasts and Australia was also adversely affected by weather. But the market most at risk of declining soft commodity prices is South America and the broker notes the company is attempting to mitigate all risks by actively assessing credit exposures. Europe is expected to be flat, with higher branded sales offset by lower manufacturing overhead recoveries. That all said, Deutsche Bank upgrades to Buy from Hold.

JP Morgan is a little more cautious and considers the rise in the share price, combined with the risks around demand in Australia because of the rainfall necessary to return to "normal" seasonal conditions, means the stock represents fair value on a risk/return basis. Nevertheless, JP Morgan also acknowledges a better balance sheet, with gearing falling significantly and a capital raising risk removed. Growth in South American sales has permanently increased the seasonality of the company's working capital requirements with a peak at the end of the first half. As a result, the broker believes concerns regarding gearing could re-emerge in March 2015. Goldman Sachs is also in the cautious camp. The broker is concerned about the decline in soft commodity prices, which could potentially cause farmers to reduce planted acreage and lead to lower demand for crop protection chemicals, especially in South America.

The turnaround in cash flow was the main feature of the results for UBS. The company appears in a much better position in the current half year to manage its funding needs. UBS raises FY15-16 earnings forecasts by 6%, reflecting a higher base and positive FX impact and, for the first time since October 2012, upgrades its rating to Buy from Neutral. UBS acknowledges the company's earnings can be difficult to forecast but believes its estimates incorporate conservative outcomes within the key segments of Australia and Latin America. Macquarie welcomed the positive news on cash flow, working capital and debt reduction and expects the easing of fears over the balance sheet will allow the stock to re-rate towards multiples consistent with international peers.

If it were not for the achievement of cash flow and balance sheet metrics, Citi believes that the company would be unable to take advantage of an enviable position in Latin American markets, as well as the improving outlook in Australia and the long-term prospects for seeds. Citi expects the prospect of robust FY15 earnings growth should support the share price although risks remain, none the least being the cropping conditions in Australia. Citi sticks with a Neutral rating.

The Buy ratings have the upper hand on the FNArena database and now number five compared with two previously. There are now two Hold ratings, compared with five previously. The consensus target is $5.16, suggesting 8.4% upside to the last share price and this compares with$4.73 ahead of the results. Targets range from $4.85 to $5.87. 
 

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article 3 months old

Incitec Pivot: Fertilisers Weak, Explosives Supportive

-More reliable production
-Fertilisers weather affected
-US recovery the main positive
-Risks with Aust gas supply
 

By Eva Brocklehurst

Incitec Pivot ((IPL)) remains vulnerable to weather conditions but whatever the weather there are positives and negatives. A recent investor briefing delivered a softer assessment for fertilisers in FY14, with the company's year-end occurring this month. Still, brokers were relieved that both the Moranbah and Phosphate Hill plants are now operating more reliably.

Fertiliser tonnage in FY14 will be lower, a negative, with the company expecting 1.8mt versus the 2.05mt in FY13. There have been lower urea sales at lower domestic prices, as inventory was built up ahead of the recent commodity price rally. Nevertheless, the wet weather that affected fertilisers should assist the mix of emulsion volumes versus bulk ammonium nitrate, which should allow Moranbah to deliver earnings at the top of the forecast range.

There is also some softness in the Western Australian explosives market, with the mining downturn more challenging for the company than previously assumed, and Phosphate Hill production is likely to be at the lower end of guidance. Deutsche Bank observes the company is primarily a distributor in Western Australia and margins are being squeezed as the major supplier Wesfarmers ((WES)) increases prices to recover higher gas costs. Incitec Pivot is not able to pass these costs so easily through to customers as there is now surplus capacity, given Wesfarmers' expansion and the fact Orica ((ORI)) has recently entered the market.

The US construction recovery continues to underpin the stock, although the company has warned of a slower rate of recovery for FY14, while trading conditions in other explosives markets are still soft. The US market has a positive position on gas costs and the structure of the ammonia market which should stand Incitec Pivot in good stead. Citi notes the medium term outlook for ammonium nitrate is weaker as growth expectations for the next five years have been lowered in all markets. The desire of miners to continually reduce costs will not go away and this is exerting pressure on explosives suppliers.

Australia is where the risks mostly lie, and where the next key decisions are likely to be made. Brokers are reminded of the risks to the Australian fertiliser business beyond the current gas supply arrangements. The company's objective is to offset the impact of gas cost increases at Phosphate Hill through plant reliability and improvement initiatives. Credit Suisse suspects Gibson Island production is at risk beyond when the current gas supply agreement ends in 2017. A strategic review of some assets is being undertaken, namely Nitromak, Fabchem and SSP manufacturing assets, and may result in write downs, but Credit Suisse does not believe this will be material to the outlook.

Deutsche Bank also notes the outlook was soft, with Phosphate Hill production expected to be at the low end of prior guidance. On the positive side, the Louisiana plant is on budget and North American explosives volumes are improving. On the negative side, fertiliser distribution volumes are likely to be lower by 10% and the Dyno Nobel Asia Pacific explosives market remains challenging.

Macquarie notes earnings downgrades are becoming a perennial theme for Incitec Pivot, but acknowledges most of the downside is in fertilisers. Moreover, this is a lower value area for Incitec Pivot and seasonal variances are outside management's control anyway. What is important is the company is on top of the internal issues and Moranbah is now likely to sustain nameplate production. Macquarie analysts admit to feeling better about the company's manufacturing performance and the risks than was the case six months ago.

The company is maintaining a strategy which should ultimately enhance shareholder returns from FY17, in Citi's view. While the market is expected to look through the near-term softness, Citi believes the catalysts are limited. Credit Suisse expects cash generation to improve significantly from FY16 and the company could move to a period of increasing capital returns to shareholders.

CIMB found management's tone bearish, but the downgrades were not a great surprise, with the key divergence from prior forecasts being a deterioration in operating conditions in fertilisers from particularly subdued cropping conditions. Both Goldman Sachs and CIMB welcome the company's confidence in the fact that the Louisiana ammonia project will capitalise on the divergence between US natural gas and global ammonia prices to achieve a 15% internal rate of return but neither broker is carried away. Both consider the stock is fairly priced. On FNArena's database there are three Buy and five Hold ratings. The consensus target price is $3.15, suggesting 6.4% upside to the last share price. Targets range from $2.81 to $3.27.
 

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article 3 months old

Select Harvests Rolling In Clover

-17% increase in plantings in FY15
-Strong almond prices continue
-Substantial growth now likely
 

By Eva Brocklehurst

Select Harvests ((SHV))  is on a roll. The almond producer's earnings were expected to level off in two years time, along with the maturing of its orchards, but the medium-term growth profile has been considerably strengthened.

The company has raised $47m in capital, at $5.35 a share, and announced a $62.8m suite of acquisitions. The three properties acquired involve land and orchards in both Victoria and South Australia. In Victoria the acquisition includes 1,600 acres of land to support new orchards, a property of 435 acres of planted almonds and development land comprising 1,365 acres. The property in South Australia comprises 2,046 acres of almonds and a development land bank of 1,500 acres. Moelis estimates the effective price was $17,000 per acre for the orchards and $1250 per acre for the undeveloped land. This acquisition implies a 17% increase in planted orchards for Select Harvests in FY15, allowing for crop rotation.

A doubling in planted acreage is the company's objective for 2018, using the land bank. This should provide 21,659 acres under plantings, versus the current 10,800 acres. Moelis estimates this would require a $80-90m capex program over the years to 2018 and underpins a strengthening of earnings over the medium term.

Despite a softer-than-expected FY14 result, given higher costs associated with the weather's impact on the latest harvest, Moelis still upgrades forecasts for the next three years. The broker believes the fundamentals are undemanding, as the almond producer is well placed and benefitting from robust demand in an international industry that continues to be affected by a prolonged drought in California, which usually supplies more than 80% of the world's almonds.

FY14 underlying profit was still up 8%, with a final crop size of 10,500 tonnes compared with initial projections of up to 12,600 tonnes, which was similar to that achieved in FY13. This weaker harvest was partly offset by an average price of $8.40/kg for the nuts, despite the sub-optimal quality, compared with $6.60/kg in FY13. Moelis expects earnings per share growth of 28.6% in FY15 and 10.5% in FY16. A dividend of 24c is forecast in FY15 and 26c in FY16, equating to a pay-out ratio of 43.4% and 42.6% respectively. The broker retains a $6.75 target and Buy rating.

See also, Select Harvests' Profit To Peak In FY15 on June 25 2014.
 

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