Why ag’s sharemarket ride remain bullish

Longer term ag sector demand prospects are driving expectations, while low interest rates on cash investments and subdued returns in other sharemarket categories are also diverting attention towards previously overlooked farm export, production and service ventures.

Even the Australian superannuation industry’s notorious reluctance to invest in agribusiness has shown signs of changing.   

“The past two years have been particularly busy with new listings and capital raisings attracting attention, particularly for quality companies with good management backup,” said Morgans’ agribusiness research analyst, Belinda Moore.

Eight agribusiness made initial public offerings (IPO) on the Australian Securities Exchange (ASX) in 2016 and six in 2015.

That compared with just five from 2012 to 2014.

However, some starters fell well short of their performance targets.

Seriously depressed global milk prices and soaring beef export costs played cruel hands for ASX newcomers, the dairy processor Murray Goulburn, and livestock exporter Wellard in 2016, while the high-flying Chinese dairy nutritional powder market lost altitude for the likes of longer listed Bellamy’s, Blackmores and Bega.

But investor activity in the agribusiness space shows little evidence of going off the boil.

South Australian-based Accolade Wines, the nation’s largest winemaker and exporter, is set for a $1 billion float by June, while organic vegetable producer, Jiajiafu Modern Agriculture is the latest of an emerging crop of Chinese-based farming companies listing in Australia with its float planned after a $9 million capital raising closes on February 19.

New Zealand agronomy services and data analysis specialist, CropLogic, has flagged an IPO by about March having recently moved to buy a firm in the US.

A full ASX float is also being considered by farmer-run Namoi Cotton, and farmer-owned SunRice still wants to push ahead with its own capital restructure hopes involving a partial ASX float, despite putting those plans on ice in 2016.

Agribusinesses debuting on the ASX last year included Australia’s biggest chicken meat producer and processor, Inghams Enterprises, which notably attracted solid overseas investment.

Although Inghams shares have struggled to beat their November float price of $3.22, Morgans’ Ms Moore tips double digit earnings per share growth in the next two years and has a $4 a share target price on the stock.

She said rising poultry meat demand, by as much as five per cent annually in Australia and NZ, plus scope to further automate Inghams’ processing operations and lift margins (currently well below its industry peers) made the poultry business literally “cheap cheap”.

It was an attractive prospect compared to other lower yielding players in the same field.

“We believe Inghams is undervalued,” she said.

“It offers investors both yield and growth and we think it will deliver a strong first half result in February.”

While agriculture’s seasonal and market volatility made it complicated to forecast agribusiness performance, Ms Moore said the overall picture continued to be “very positive” and interest in new sharemarket listings reflected that picture.

Not only were more agribusinesses needing fresh investor capital to grow and help them tap market opportunities, the share market was reflecting greater investor demand for agribusiness-related equities.

A good example was the December-listed Murray River Organics, the world’s largest organic dried vine fruit producer.

It recently bought two food distribution companies broadening its portfolio into nuts, seeds, berries and other lines sold in 26 countries.

Based on the Victoria-NSW border near Mildura, it forecasts a 50pc revenue lift and almost 100pc profit growth in 2016-17, with further gains from production synergies and maturing vines likely next year.  

Ms Moore said while Murray River set itself a busy agenda and was exposed to production risks, global organic markets were growing 14pc annually and it had few competitors.

Senior Bell Potter Securities share broker, Hugh Robertson, conceded some recent ag sector floats had turned into high profile disappointments, but it was hard to avoid commodity market cycles, particularly in agriculture.

“You can make a fortune if you pick the right time to buy in –  Bega’s made a big rebound in the past month,” he said.

“However don’t lose sight of the fact that businesses like Murray Goulburn and Bellamy’s are exposed to a lot of different factors including weather, currency and erratic market influences like China.

“It also takes time for businesses develop momentum and a track record.”

Institutional investors were looking more closely at agribusiness, but they liked certainty of earnings, so they were inherently cautious.

“Agriculture has a lot of investment potential ahead of it, but Australia is renowned for being the last place on earth to recognise when a boom is on,” he said.

“The resources boom was a good case in point and today’s emerging food and agricultural market situation is not so dissimilar.”

Mr Robertson said agribusiness also had a fairly conservative mindset about growth and spending, particularly when paying for assets like land.

It was dominated by family or cottage industry-sized enterprises which often “sneer at corporatised agribusiness” ambitions.

“The reality is we are part of a global picture – farmland prices might seem overvalued to us, but you’ve got to think about why overseas buyers are investing here.”