Agriculture has its day in the sun

IF Melbourne stockbroker Hugh Robertson had any doubts that agricultural and food companies had become the new favourite of the stock exchange, they were quickly erased this week.

Organising an investor briefing ahead of the $200 million float of poppy processor and narcotics manufacturer TPI Enterprises, he was surprised to find more than 100 fund managers, analysts, private investors and corporates rushing to join the throng.

Yet a reporting meeting yesterday morning of former stockmarket darling during the mining boom’s heyday, Monadelphous, attracted just three observers.

“Agriculture is unquestionably the new ‘cool’ in the market and it’s not all that surprising. It’s something this country does really well, is sustainable and, with the world running out of food, you couldn’t wish for better macro settings,” says Robertson.

“We are starting to see a sea change among some of the smartest individual investors moving into the sector, and when that happens you know other investors will follow hook, line and sinker.”

It is not necessary to look too far to see where the smart money is starting to flow.

Just yesterday, it was announced Australia’s oldest listed company and the nation’s biggest cattle business and landowner, the Australian Agricultural Co, would be moving into the top ASX 200 index this month.

It was not a surprising revelation, as AACo’s share price has soared by 29 per cent in the past six months, from $1.24 in September to $1.60 yesterday.

It now has a market capitalisation of $844m, making it Australia’s third largest specialist agribusiness after GrainCorp and Nufarm.

Significantly, Bahama-based billionaire investor Joe Lewis has increased his share in the company that owns more than seven million hectares or 1 per cent of Australia, to close to 30 per cent.

Another canny investor, former waterfront boss Chris Corrigan, is another with his wealth increasingly embedded in the agribusiness sector.

Last week, Tasmanian-based Websters, which was once a small rural agent but has grown to become Australia’s biggest specialist walnut producer with a capitalisation of more than $200m, announced it was making a bid for listed cotton growing and water trading company, Tandou.

The move, along with other recent acquisitions of big Riverina properties and others in northern NSW, will turn Websters into Australia’s biggest owner of irrigation water rights, as well as allow it to expand its own walnut orchards on the Murrumbidgee River around Leeton and Griffith.

Corrigan, who also has interests in the grain rail and new Port Kembla grain export port though his interest in Qube Holdings, is already a 20 per cent owner of Websters and will increase his stake after the Tandou merger.

And then there are savvy businesspeople like Fortescue’s Andrew Forrest, iron ore magnate Gina Rinehart, legal eagle and philanthropist Allan Myers and media king Harold Mitchell, who are switching their investment focus away from their traditional fields into the cattle, agriculture and dairy industries, directly buying northern Australia outback stations and southern dairy farms.

AACo chief executive Jason Strong says he is excited by the growing interest of global and Australian investors in the agricultural sector, as the full implications of the world population growing from 7 billion to nearly 10 billion by 2050 hit home.

“Becoming a new darling of the stock exchange is not exactly the sort of status we have been striving for, but it would be nice if something as traditional and homely as food production became one of the categories that was most popular on the stock exchange,” says Strong.

“In the past, it has been the agricultural shares that were slightly more industrial in either logistics or production than us — like GrainCorp or (farmed salmon company) Tassal or (almond grower) Select Harvest — that have had more support than ours.

“It’s easy to say that it’s because people didn’t really understand northern Australia and cattle, but I think it’s also about investors not understanding the long term cycle of agriculture; now the market is getting better informed and the interest in agriculture is growing as the food issue of the future becomes more obvious to everyone.”

Senior director of Pac Partners, Paul Jensz, is one of the few broking and corporate finance specialists who focuses on listed agricultural companies, and helping others prepared for floats.

He is forecasting that 2015 will be the year of change for the agricultural sector, with companies performing well, and a host of other well-known agricultural and value-added food companies preparing to list.

One big bonus is the falling value of the Australian dollar that is making exports so much more competitive on global markets, and the fading of the mining boom which has dominated the Australian market over the past decade.

“The big question now is whether the whole (agricultural) sector will be rerated up and the bar lifted again because stocks in other sectors are not performing well and investors are looking for somewhere to put their money, and if the batch of smaller or recovering companies can catch up with the proven performers with big capex,” says Jensz.

Jensz singles out three companies for praise. Select Harvest has seen its share price grow from $1 to $7.50 in the past three years, its capitalisation has jumped to $546m, its almond production has expanded and it has attracted strong support from institutional investors.

Similarly Bega Cheese has risen from $2 to $5 a share, while Tassal has recovered from its receivership in 2002 to see its shares soar from $1 to around $4 in the past three years.

There are now 10 agricultural companies with a capitalisation of $300m and above — GrainCorp at $2.bn, chemical giant Nufarm at $1.94bn, AACo at $844m, Bega Cheese at $740m, Tassal at $557m, Select Harvest at $546m, Warrnambool Cheese & Butter at $465m, Huon Aquaculture at $425m, Ridleys stockfeed company at $325m, and rural services company Ruralco at $290m.

A market cap of $300m is the point where Jensz believes investors and analysts have to consider companies as reputable and stable options, and he wonders if there will come a time soon when the ASX considers introducing a special agricultural index.

There is no doubt that the eyes of savvy investors are already ­focused on the floats flagged in the sector for this year.

Australia’s largest fresh berry and vegetable grower, Costas, headed and part-owned by Geelong-based vegetable king Frank Costa, looks to be heading down the path towards a full float, after dithering between a capital raising and a public offering.

With good brands, established partnerships and US capital already embedded in its structure, a float with investor support could give Costa a capitalisation of anywhere between $600m and $1bn.

Dairy co-op Murray Goulburn and ricegrower and marketer SunRice are both heading for listings midyear of side funds or trusts, designed to raise $500m and $200m respectively, while not removing ownership of the businesses from farmer hands.

Also heading for IPOs are poppy processor TPI, Adelaide-based Beston Food Global which is being very cagey about what almond, dairy and other assets it actually owns, and Tasman Dairies, a new shell company which looks set to float with Australia’s largest and oldest dairy farm, the northwest Tasmanian Van Diemen’s Land Co, as its star asset.

Victorian-based dairy processor Burra Foods is also being mentioned as a listing, while the cattle property portfolio STAG Beef being assembled by former Queenslander Keith de Lacy remains a potential candidate.

A2 Milk, with a health-linked brand that is the envy of every other milk processor, is “seriously contemplating” a listing this year to fund its expansion.

The success last year of the float of organic baby food company Bellamys — which listed at $1 a share and is $2.7e — is one other rural firms with value-added brands are keen to emulate.

Investment banker David Williams, an adviser to Bega Cheese and Tassal and a big owner of Tasmanian water licences, predicts the hottest sector this year will be horticulture.

But he warns investors to beware of unsustainable pricing of shares in companies that directly own land and farms, especially in the dairy sector, where agricultural risk and climatic variability is not being factored in.

Hugh Robertson has a similar message.

“Along with all the serious and good companies that are establishing themselves, it is inevitable there will also be a lot of opportunistic play in the agricultural sector too,” says Robertson.

“It’s a great sector and like every emerging sector, it will be a case of tiptoeing through those stocks that are really good, others that are reasonable, and those that are just an outright scams — and hoping we don’t get too many of the latter.”