Questions over value in agri-food stocks

09 Jan, 2018 04:00 AM
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 Nufarm chief executive Greg Hunt, Morgans rates the stock as attractively priced.
Nufarm chief executive Greg Hunt, Morgans rates the stock as attractively priced.

INVESTING in agriculture is a lot like farming itself – there are rewards in picking your markets and picking your timing.

Analysts point out that plenty of stocks have gathered considerable momentum and are trading at big multiples going into 2018.

That doesn’t surprise them given the level of commentary about the positive long-term fundamentals of the agri-food sector.

Select Equities analyst Mark Topy senses a climate ripe for merger and acquisition activity, with some initial public offerings that will require careful scrutiny.

“The minute I see investment bankers going into food space, I start to worry,” Mr Topy said.

“There is a bit of momentum trading happening in the space at the moment, so we might see some floats get away that are not the best quality.”

The counter to that is the prospect of well-established businesses with earnings history making the leap to public listing.

Mr Topy’s advice is focus on reputation and quality just like the so-called daigou shoppers who are buying products to sell via Chinese social media platforms and who have contributed to the rise of companies leveraged to the Chinese market.

Analysts at Morgans, led by Belinda Moore, note a broad-based rally in nearly all such stocks, including Bellamy’s Organic, Blackmores, A2 Milk and Bubs Australia.

Even taking into account the size of the market opportunity, Morgans clocks these companies as running ahead of near-term fundamentals, given they trade at about a 50 per cent premium to bigger global peers in fast-moving consumer goods.

“In light of potential regulatory risk, we believe current valuations do not provide investors with a requisite level of safety to justify an investment,” is the blunt advice from Morgans to its clients.

However, agri-food companies that can leverage off a brand name in China and take advantage of Beijing warming to cross-border e-commerce remain tempting if the price is right.

Deloitte Australia head of agribusiness Rob McConnel believes the question of whether or not a farmer needs to own the farm will become increasingly relevant in 2018.

Rural Funds Group and others have shown that a business model where they acquire farmland and then lease it to producers can work and reduce their exposure to commodity price fluctuations.

Arrow Funds Management, led by former Webster managing director Andrew Ashbolt, is one of the emerging farm accumulators being touted as future IPO candidates.

Mr McConnel said the leasing model was becoming increasingly relevant to the sector.

“This is driven by both the demand side (in financial investors looking for capital intensive and land-backed assets) and also in the supply side (as farmers are looking to take that capital event which will either assist in succession planning and/or to fund increased operations through acquisitions themselves),” Mr Connel said.

Mr Topy said seasonal conditions were a factor for the biggest to the smallest in the sector.

He sees an upside for almond producer Select Harvests and honey maker Capilano if conditions work in their favour.

A boost in supply would help Capilano as it tries to crack into the China market while Select Harvests is due for a better production year and set to benefit from a weaker Australian dollar.

Morgans rates Nufarm, with a market capitalisation of about $2.7 billion, as attractively priced and a great way to gain exposure to the global agriculture market.

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Good to know that thousands of caring people in all walks of life oppose the cruel live animal