Agri stocks make a comeback in 2015
A look at the performance of agri-related businesses listed on the ASX.
The Agribusiness Bulletin
The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise.
Agri stocks make a comeback in 2015
For some time now, we at Deloitte have been talking to the business community about the high potential of Australian agribusiness.
We highlighted agribusiness as Australia’s strongest potential growth sector and where we felt Australia had the strongest global advantage in Building the Lucky Country #3, Positioning for Prosperity. Despite its obvious cost disadvantages, we felt this was outweighed by Australia’s natural resources, the likely level of the Australian dollar, our ‘clean and green’ image, and our access to Asia and its booming demand for protein.
So how has that come to play out?
Positioning for Prosperity did not provide a panacea for significant short term gains. Rather it was all about the role business (and to a lesser extent Government) could play in positioning ourselves for the coming wave over the next 20 years.
A number of these drivers have come to fruition including increased market access through Free Trade Agreements (FTAs) with Japan, Korea and China and the Trans-Pacific Partnership (TPP), all of which will improve our position with these key trading partners.
Foreign exchange rates were also noted as a key stumbling block as exporting commodity struggled against a AUD/ USD over parity. The more recent experience of 70 cents is much more palatable and is forecast by many to continue, at least in the short term.
The Agribusiness Bulletin article from earlier in the year, Has beef turned a corner?, which called out a change in the beef industry, was in hindsight correct, although the gains were not necessarily consistent across the industry this year. Drought has gripped much of the country, particularly in the home of beef, Queensland. So whilst prices are at all-time highs, returns next year may not reflect this change given a number of operations had to destock before they could take advantage of the price improvement.
So to take a different lens to agribusiness returns we decided to have a look at the performance of agri-related businesses listed on the ASX.
The results were very surprising.
The first point to make is that agribusinesses do not make up a large proportion of listed companies in Australia. The variable returns and longer investment horizons do not easily lend themselves to being listed on the share market which is increasingly becoming a month to month, week to week proposition. Agribusiness investments do not play out over such a short time horizon.
Whilst not an official index our basket of ASX-listed agribusinesses was a cross section of listed companies. We looked at the returns and market capitalisations of 38 listed companies in Australia across agribusiness services, agribusiness technology, beef, dairy, eggs, fertiliser, forestry, horticulture, seafood and wine. The market capitalisation of these companies was a meagre $20.4 billion as against the market capitalisation of the All Ordinaries of $1.58 trillion.
The most surprising finding was the incredible gains that have been made by Australian agribusiness stocks this last year (to 30 November). The one year average return for our basket of stocks was an eye-popping 66.9%. That is against the S&P ASX 300 return of negative 0.2% and the US S&P 500 of 3.2%.
The sectoral view also provides some interesting insights – investors in dairy, forestry and wine fare very well. Click here to view the one year average returns by Agribusiness sector.
The major factors generating that return is the continued success of Bellamy’s (now almost capped at $1 billion) and the major turnarounds of Elders, Ridley, Nufarm and Treasury Wine Estates which made up a significant proportion of the basket. Elders in fact won the ‘Turnaround of the Year’ award at the recent National Turnaround Management Association awards – belated congratulations go to Mark Allison and the team at Elders. These returns are a clear nod to the art of restructuring in the sector and the incredible gains that can be made when restructures are executed properly. (A short plug, Deloitte also picked up the ‘National Small Business Turnaround of the Year’ at the same awards for our role in the turnaround of Withcott Seedlings).
Given that most of the gains are related to turnarounds in the sector, the fundamental question remains. That is, can Australian agribusiness generate a viable long term return?
One of the answers may lie in some of the other statistics from the basket we considered. Encouragingly, the basket of stocks generated a return on equity of 36.9%, indicating a high level of capital efficiency. It also indicates strong management capability of those managers of the capital to which they have been entrusted. Of course, the share market doesn’t operate in a vacuum and the potential of the sector appears to have resulted in a higher rating with the average price/earnings ratio of our basket at 30.9, well above the current market average of 15.9.
Despite these gains, and the questions that remain, our view is that the long term prospects of the sector are strong. This year’s returns may finally be seeing us starting to realise that potential.