In 2020, Australia’s agriculture, forestry and fishing industry accounted for 2.1% of total Gross Value Added (GVA) and manifested a desirable 1.4% CAGR (FY1990 – FY2020). According to the Australian Bureau of Agriculture and Resource Economics (ABARES), Australian Farmgate output is on course to hit a record-setting $66.3 billion in FY21 amid groundbreaking turnaround of wheat, canola, and barley shipments. Further, ABARES revised prior estimates for a gross value of exports and production, up by $400 million in FY2021. Seasonal conditions during 2021 autumn have stayed appropriate supporting growth prospects in crop and pasture production. Developments in Australia-UK FTA may add diversification to Australia’s portfolio of trade partners and widen the market for the country’s agriculture products. The non-cyclical nature of the agriculture industry has kept it afloat in international trades.
Figure 1: Favorable Value of Exports and Production Anticipated
Source: Department of Agriculture, Water and the Environment, Analysis from Kalkine Group
As per the data by the Australian Bureau of Statistics, the Gross Value Added (GVA) of the agriculture industry showcased a modest improvement in FY20 to $61 billion amidst drought conditions. The gross value of crops declined by 5% and stood at $28 million, primarily driven by unpropitious YoY results from wheat (down 20%), vegetables (down by 4%) and cotton (down by 78%), and predominantly supported by 9% uptick in fruit & nuts, stable barley and 1% uptick in canola values. Moreover, drought conditions poised significant restraining factor for broadacre crops in New South Wales, Queensland, and Western Australia.
Figure 2: Impact of Drought Conditions on Agricultural Production by States:
Source: Australian Bureau of Statistics, Analysis from Kalkine Group
In FY20, agricultural land in hectares declined by 2% YoY and stood at 377 million hectares. During the period, water availability declined, increasing water costs, which subsequently warranted a 72% YoY drop in cotton production. In the same period, the water application rate declined for all crops and pastures, except for sugarcane and rice, primarily pushed by drought, bushfires, and COVID-19 impact.
Nevertheless, situations have turnaround for FY21 with favorable weather conditions and water supply. Precipitation for 3-months to April 2021 was registered 70 – 100 rainfall percentile in most regions of Western Australia and New South Wales, and 30 – 90 rainfall percentiles in Queensland. For May 2021, the relative moisture percentile of upper layer soil moisture was 30 – 70 for most cropping regions in Eastern and Western Australia, while the relative moisture percentile of lower layer soil was 30 – 100 for cropping regions in northern and central New South Wales, southern Queensland, and Western Australia. During FY21, the average water price in southern Murray-Darling stood at $154 per million litres, significantly down from the average annual price of $587 per million litres.
Figure 3: Water Application Rate for Crops and Pastures:
Source: Australian Bureau of Statistics, Analysis from Kalkine Group
As per ABARES, the fishery production value is expected to slide down to $3.01 billion from $3.15 billion in FY21 due to COVID-19 and international trade disruptions. As the industry phases out of COVID-19 impact and international trade reach normalcy, aquaculture production is expected to uplift and thrust the industry by a 1.6% average annual growth rate by FY26. The Australian government is extending $20 million investment into IT infrastructure by way of the E-Fish initiative and E-monitoring program to resurge provenance requirements and traceability.
In FY21, the gross livestock production value is estimated to reach $30.81 billion, down by 6% YoY. The gross value of mutton production, live cattle export and wool production are expected to slide down by 18%, 24% and 19, respectively. Beef & veal, dairy products and wool & lamb are estimated to account for 37%, 17% and 11%, respectively of exports value. Major recoveries are expected amidst improved seasonal conditions. World demand for dairy products has outreached supply which may imply higher milk prices in FY22. China’s import demand for dairy products is expected to surge as high feed prices have stagnated domestic milk production. In year-to-date March 2021, butter exports surged by 100% YoY, predominantly resulting from a 438% export increase to China. China’s growing demand further hiked export volumes of silk milk by 19% between July and March.
Figure 4: Gross Value of Fishery and Livestock Production:
Source: Department of Agriculture, Water and the Environment, Analysis from Kalkine Group
Key Risks and Challenges
The recovery of China’s pork production and outbreaks of African swine fever has relaxed import demand and global meat prices hence affecting the Livestock industry. Demand for wool and cotton nosedived as textiles and travel industry delay recoveries amidst COVID-19 pandemic. Discrepancies in labor supply may hinder labor-intensive operations, for instance, meat processing, fruit picking and shearing. Australia’s agriculture industry exhibits an undiversified portfolio of trade partners while being highly dependent on China. Australia demonstrates highly variable climatic conditions; considering the livestock segment is in the rebuilding phase, any disruption in seasonal conditions may drain significant export values.
Figure 5: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
For FY22, the gross value of agricultural production is expected to descend from the record high to a still magnificent level of $65 billion, and the gross value of exports is forecasted to heighten to $49.7 billion, according to ABARES. The three months rainfall outlook (from June 2021) from the Bureau of Meteorology states that winter rainfall is most likely to withstand above average in cropping regions of Victoria, New South Wales, South Australia, and Queensland, while below average in Western Australia with chances of exceeding median being less than 45%. In average and wet scenario average annual water prices are expected to range between $57 per million litres and $114 per million litres, considerably below current levels. Between FY22 and FY26, the export value of the seafood industry is expected to uplift by 1.8% at $1.35 billion, with a 0.4% average annual growth rate. For FY22, the value of livestock production and exports are expected to rise by 4% to $32.2 billion and by 11% to $24 billion. Australia’s farmgate milk price is expected to surge by 2.4% and stand at 50.7 cents per litre, according to the data by ABARES. Considering the improvement in the agricultural production, we have figured out 4 stocks on ASX that are set to see the momentum.
Figure 6: Outlook Framework for Agricultural Production:
Source: Analysis by Kalkine Group
(1) Nufarm Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.77 billion, Annual Dividend Yield: 0.00%)
Top-line Shoots with Favourable Seasonal Conditions and Commodity Prices: Nufarm Limited (ASX: NUF) is a manufacturer and developer of seed technologies and crop protection. Despite COVID-19 challenges, NUF registered a revenue growth of 6.5% to ~$2.85 billion, followed by top-line growth in North America, the ANZ region and seed technologies. On the contrary, operational efficiency took a hit, and EBITDA declined by 21%, which stood at $236 million, and EBIT declined by 75%, stood at $34 million.
In H1FY21, NUF posted $1.65 billion in revenues and $234 million in underlying EBITDA, a growth of 20% and 118% on PcP basis, respectively. NUF’s top-line improved by PcP growth of ~$85 million in APAC, $62 million in Europe, $13 million in North America and $39 million in seed technologies operations. The performance improvement program reduced SG&A expenses by ~$24.6 million and other discretionary expenditures. Free Cash Flow stood at $9 million, primarily attributed to $63 million in operating cash flow.
Outlook: In FY21, NUF expects a full-year run-rate of $25 million for SG&A. Average NWC/Sales matric is expected to remain range-bound between 35% - 40%. FY21 capital expenditure is expected to remain below $180 million. Growing volumes and economies of scale is warranted by rising grain prices, market share gains and strong early demand from APAC, Europe, and seeds technologies business.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
A-VIX vs NUF (Source: REFINITIV)
Stock Recommendation: Over the last three months, the stock of NUF went down by ~2.53%. The stock made a 52-weeks’ low and high of $3.370 and $5.600, respectively. The stock overperformed the market volatility index indicating the resilient business model. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight discount as compared to its peer median EV/EBITDA (NTM trading multiple), considering the FY20 decline in operational efficiency, significant currency risks and volatile commodity markets. We have taken peers like Incitec Pivot Ltd (ASX: IPL), Orica Ltd (ASX: ORI), Scidev Ltd (ASX: SDV), to name a few. Considering the relatively high FY21 run-rate expectations, controlled average NWC/Sales matric, the current trading levels, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.620, down by ~1.071% as of 21 June 2021.
(2) Synlait Milk Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 773.77 million, Annual Dividend Yield: 0.00%)
Robust Demand for Dairy Products Led Sustainability Intact: Synlait Milk Limited (ASX: SM1) is engaged in the dairy products business which involves manufacturing and distribution of milk powder & related products, liquid milk, cheese and butter. Whilst COVID-19 turmoil disrupted several major markets, SM1 remained unaffected with revenues up by 27%, stood at NZ$1.3 billion and EBITDA up by 13%. Sales volume for packaged infant formula and lactoferrin were up by 15% and 46%, respectively. Containment measures in COVID-19 escalated fresh milk and cream sales by 13%.
In H1FY21, revenue was up by 19% PcP and stood at NZ$664.2 million as a result of favourable global dairy trade price. On the contrary, gross profit declined by 28%, and EBITDA declined by 29% and stood at NZ$59.7 million and NZ$47.7 million, respectively. Customers’ switch in product mix from high margin products (infant base powder) to low margin products significantly affected operational efficiency. Operating cash outflows stood at NZ$69.1 million as a result of seasonality aspects, shipping delays and lower product margin mix.
Outlook: Considering market turmoil and unexpected change in product mix, SM1 is expecting net profit after tax loss of between NZ$20 million and NZ$30 million for FY21. Lower prices for ingredient products and shipping delays are expected for the next half of the year. Long-term prospects remain positive with NZ$2 billion revenue target, develop the capacity phase for FY21 – FY25 and explore expansion phase by FY26.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs SM1 (Source: REFINITIV)
Stock Recommendation: Over the last three months, the stock of SM1 went down by ~2.0%. The stock made a 52-weeks’ low and high of $2.640 and $6.970, respectively. The stock performed well over the market volatility index as operating segments were unaffected by the pandemic. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight discount as compared to its peer average EV/Sales (NTM trading multiple), considering expectations for lower price ingredient products, shipping delays and changing product mix. We have taken peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Bega Cheese Ltd (ASX: BGA), to name a few. Considering the positive long-term prospects, fast-paced adjustments for new product mix, the current trading levels, and valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $3.440, down by ~2.825% as of 21 June 2021.
(3) United Malt Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.36 billion, Annual Dividend Yield: 0.00%)
Approaching Pre-COVID Levels: United Malt Group Limited (ASX: UMG) operates in the distillery business, and is involved in the production, distribution and warehousing of malt. During FY20, revenue declined by a modest 2.1% and stood at ~$1.3 billion, and underlying EBITDA declined by 11.1% and stood at $156.1 million. The significant operational downgrade was warranted by changing the product mix to low margin products and lower sales volumes. Despite EBITDA shortfalls, operating cash flows improved to $101.7 million from $93.0 million in FY19.
In H1FY21, revenue declined by 11% and stood at $590 million, and EBITDA declined by 32.3% and stood at $52.7 million. Unfavourable currency fluctuations and COVID-19 impact were the major deterioration factors. The COVID-19 related costs, processing costs and container disruptions contributed $1.8 million, $6.9 million and $2.2 million increase in operating expenses. In contrast, operating cash flows improved significantly to $22.8 million with cash conversion of 43% as a result of favourable interest expenses and better working capital management.
Outlook: Expectations for H2FY21 remains conservative while expecting volume recovery. Corporate costs are estimated to be $12 million, which includes high insurance costs. Capex for FY21 is expected to stick around $120 million. UMG is focused on optimising the core by expanding Scottish distilleries, penetration in the Mexican market and developing Victoria’s warehousing & distribution centre.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
A-VIX vs UMG (Source: REFINITIV)
Stock Recommendation: Over the last three months, the stock of UMG went up ~6.46%. The stock made a 52-weeks’ low and high of $3.530 and $4.970, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight premium as compared to its peer average EV/Sales (NTM trading multiple), considering steady recovery to reach pre-COVID levels, high operating cash flows despite market turmoil and expansion strategies. We have taken peers such as Inghams Group Ltd (ASX: ING), Huon Aquaculture Group Ltd (ASX: HUO), Costa Group Holdings Ltd (ASX: CGC), to name a few. Considering the expansion strategies in Victoria, penetration into the Mexican market, growth strategies, we give a ‘Hold’ rating on the stock at the current market price of $4.450, down by ~2.198% as of 21 June 2021.
(4) Tassal Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 764.43 million, Annual Dividend Yield: 4.48%)
Witnessed Significant Operational Efficiency: Tassal Group Limited (ASX: TGR) is engaged in the fishery business, which involves processing, marketing and distribution of Atlantic salmon and other seafoods. In FY20, whilst revenue remained almost steady at $562.54 million (up by 0.3% YoY), operating EBITDA inclined by 23.4% and stood at $138.55 million. Subsequently, operating EBIT and NPAT increased by 12.7% and 13.3%, respectively, as a consequence of optimized biomass and size of salmons, unaffected salmon prices, strong export markets for prawns and lease benefits.
In H1FY21, revenues stood strong at $292.5 million, up by 6.6% PcP. Statutory EBITDA declined by 4.3%, and NPAT declined by 32.3% while registering $77.5 million and $27.6 million, respectively. The operating results diminished as a result of the non-controllable price factor of salmon and prawns. Reported operating cash flows stood resilient at $41.39 million relative to $40.98 million in FY19 as a result of strong harvest and biomass growth, offset by increased working capital costs.
Outlook: In FY21, Salmon harvest volume is expected to be ~41,000 hog tonnes supported by higher salmon biomass. Capex for replacement and upgrades is expected to range between $45 million and $50 million annually. Forecasted prawn’s production for FY22 is expected to be around 4,500 to 5,000 tonnes. Additional strategic takes include Proserpine farm development & footprint expansion, and disinvestment of surplus land in Exmoor Station.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
A-VIX vs TGR (Source: REFINITIV)
Stock Recommendation: Over the last three months, the stock of TGR went up by ~5.00%. The stock made a 52-weeks’ low and high of $3.160 and $3.970, respectively. The stock dominated the market volatility index owing to strong exports. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight premium as compared to its peer average EV/EBITDA (NTM trading multiple), considering resilient top-line growth, stable operating matrices despite COVID-19 disruptions and prudent cash flow management. We have taken peers like Inghams Group Ltd (ASX: ING), Huon Aquaculture Group Ltd (ASX: HUO), Costa Group Holdings Ltd (ASX: CGC), to name a few. Considering the development & disinvestment prospects, high production expectations, rebound in commodity prices, we give a ‘Hold’ rating on the stock at the current market price of $3.570, down by 0.834% as of 21 June 2021.
Comparative Price Chart (Source: REFINITIV)
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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