I. Sector Landscape and Outlook

The Food and Beverages sector is a supplier of a large set of products and is a major industry sector for the Australian economy, both in terms of employment and financial contribution. Key food and beverage categories include meat, grains, dairy, horticulture, seafood, confectionery, and beverages including wine. The sector includes large and diverse players that are well versed with the highly dynamic environment driven by demanding consumers seeking diversity, quality, and value. Australia’s diverse offerings in the food and beverage sector is also driven by large climatic differences across the Australian continent, from the tropical north to the temperate south. Moreover, the country has a counter seasonal advantage when supplying international markets in northern hemisphere. Innovative manufacturing, packaging, product development and marketing, coupled with world-class transport and distribution infrastructure, are driving growth across the sector.

As charted below, S&P/ASX 200 Food, Beverage & Tobacco Index has outperformed S&P/ASX 200 Index by a whopping 44.38% in the last 5 years.

Figure 1. S&P/ASX 200 Food, Beverage & Tobacco (Industry Group) vs S&P/ASX 200 (*5 Year)

Data Source: Refinitiv, Thomson Reuters *5^th November 2015 – 5^th November 2020; Chart Created by Kalkine Group

Key Statistics

Increase in Cafes, Restaurants and Takeaway Food Services: According to the latest retail trade update by the Australian Bureau of Statistics, cafes, restaurants, and takeaway food services rose 3.5% in September 2020, in seasonally adjusted terms. Food retailing, however, fell by 1.5%, with supermarkets and grocery stores reporting a decline of 1.3%. Notably, food retailing has peaked in March 2020 due to excessive hoarding of essential items by households in the wake of the pandemic.

Figure 2. Trend in Cafes, Restaurants, and Takeaway Food Services

Data Source: Australian Bureau of Statistics

Apparent Consumption of Food & Beverages in 2018-19: During the year, 14.1 million tonnes of foods and non-alcoholic beverages were sold. The average daily grams available from food and non-alcoholic beverage sales per capita was higher during the summer at 1,622 grams than winter months at 1,476 grams.

Figure 3. Daily Apparent Consumption of Food & Beverages by Calendar Month

Data Source: Australian Bureau of Statistics; Chart Created by Kalkine Group 

Growth Drivers

Emerging as a Hub for Agriculture 4.0: Australia’s strong record of innovation is making it a hub for the next generation of technologies set to revolutionise the agriculture and food sector. Bosch Group is investing in Australia as an Agriculture 4.0 development hub due to its rich history of producing agricultural commodities. The country has secured its foothold in Asian markets through its clean, green and safe products and was ranked 6^th out of 113 in the Economist Intelligence Unit’s 2018 Global Food Security Index., In May 2020, the Group increased its investment in The Yield Technology Solutions, an Australian Internet of Things AgTech business.

Figure 4. Drivers of Agriculture 4.0 for Australia

Data Source: Australian Trade and Investment Commission; Chart Created by Kalkine Group

Government Support to Food and Grocery Manufacturing: The Federal Budget 2021 allows for instant asset write offs for food, beverage, and grocery manufacturing companies with turnover below $5 billion, which will allow for more innovation and efficiency while creating more jobs. The Modern Manufacturing Strategy allocates $1.5 billion across the six National Manufacturing Priorities over four years, with the food and beverage sector recognised as one of the six priority areas.

Developments in the Seafood Industry: Australia’s commercial fishing industry is one of the most sustainable protein sources in the world. According to Seafood Industry Australia (SIA), the national peak-body representing Australia’s commercial fishing industry, stated that none of Australia’s solely Commonwealth-managed fisheries have been subject to overfishing for the seventh consecutive year in 2020. The government’s decision to extend the International Freight Assistance Mechanism (IFAM) until June 30, 2021 will allow Australia’s wild-catch fishers and aquaculturists to deliver produce to key international markets, providing market certainty to producers. In addition, the government has announced an investment of $4 million in SIA’s ‘Eat Seafood, Australia!’ consumption marketing campaign to encourage Australians to eat more Australian Seafood.

Figure 5. Apparent Consumption of Seafood in Australia (2003-04 to 2017-18)

Data Source: Australian Bureau of Agricultural and Resource Economics

Investment to Increase Wine Exports: The Australian Government has invested $50 million to grow Australia’s wine exports under the Export and Regional Wine Support Package, to support marketing campaigns in China and the USA, wine export and international wine tourism grants, a brand proposition and go-to-market strategy for Australian craft cider, and capability development programs.

Figure 6. Key Highlights of Australian Wine Sector

Data Source: Wine Australia, Australian Government; Chart Created by Kalkine Group 

Key Risks/Challenges 

Figure 7. Key Risks in the Food & Beverage Sector

Source: Kalkine Group

Supply Chain Disruptions: The Food & Beverage sector witnessed major disruptions in the supply of goods to global markets due to the COVID-19 crisis, majorly on the back of ban on international travel, restrictions on air-freight capacity, labour shortages, slow customs clearance, etc.

Workforce Shortage: Restrictions on cross-border travel both domestically and for foreign workers affected the production of vegetable, irrigated fruit, nut and cotton producers that rely mostly on migrant workers. Therefore, if travel restrictions remain in place, these businesses may witness increased cost of production or limited production.

Changing Consumer Preferences: Changes in consumer purchasing habits due to COVID-19 required food retailers to offer increased product surety and safety within their supply chains. Reduction in face-to-face shopping, need for contactless delivery, increased home-cooking, preference for ready-made or convenient meal options, and increased loyalty towards brands are some of the key factors that are impacting purchasing behaviour.

Product Quality: Since the products in this sector are meant for direct consumption, businesses are exposed to the risk of poor product quality, contamination, and poisoning of ingredients and end products, which can impact the brand image.

Stiff Competition: Businesses in the food and beverage sector are not only selling the product but are competing to obtain market leadership. To build a strong foundation in the market, these companies are required to undertake research and development to improve their brand, develop unique offerings, cater to all customer requirements, and seize growth opportunities in international markets.

Outlook: The Food & Beverage sector remained relatively less affected from the pandemic impacts as compared to other business sectors. Organisations operating in the sector have taken multiple initiatives in the form of capital raising, cost reduction, enhanced risk management, removal of redundant and inefficient supply chain activities to build resilience against the pandemic. These initiatives are expected to drive medium-to-long term sustainability. While demand for these products will take time to reach pre-COVID levels, a careful examination of consumer buying behaviour and cost management coupled with continuous government support can lead to positive outcomes.

II. Investment theme and stocks under discussion (TWE, TGR, SHV and CGC)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘P/E’ method.

 

1. ASX: TWE (Treasury Wine Estates Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 6.25 Billion)

The company is engaged in sourcing and growing of grapes, production, sales, and distribution of wine.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~25% on 5 November 2020 closing price. For the said purposes, we have taken peers such as Coca-Cola Amatil Ltd (ASX: CCL), United Malt Group Ltd (ASX: UMG), Costa Group Holdings Ltd (ASX: CGC), etc. At the same price, the stock of TWE was offering a dividend yield of ~3.22%.

 

2. ASX: TGR (Tassal Group Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 739.66 Million)

The Group is engaged in the farming, processing and distribution of Atlantic salmon, tiger prawns and other seafood.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~27% on 5 November 2020 closing price. For the said purposes, we have taken peers such as Inghams Group Ltd (ASX: ING), Select Harvests Ltd (ASX: SHV), Elders Ltd (ASX: ELD), etc. At the same price, the stock of TGR was offering a dividend yield of ~5.14%.

 

3. ASX: SHV (Select Harvests Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 672.82 Million)

The company is engaged in the processing, packaging, and trading of almonds through its sole/jointly owned, managed, and leased orchards.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~17% on 5 November 2020 closing price. For the said purposes, we have taken peers such as Bega Cheese Ltd (ASX: BGA), Graincorp Ltd (ASX: GNC), Coca-Cola Amatil Ltd (ASX: CCL), etc. At the same price, the stock of SHV was offering a dividend yield of ~5.16%.

 

4. ASX: CGC (Costa Group Holdings Limited)

(Recommendation: Hold, Potential Upside: High Single Digit, Mcap: A$ 1.46 Billion)

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~7% on 5 November 2020 closing price. For the said purposes, we have taken peers such as Select Harvests Ltd (ASX: SHV), Coca-Cola Amatil Ltd (ASX: CCL), Graincorp Ltd (ASX: GNC), etc. At the same price, the stock of CGC was offering a dividend yield of ~1.64%.

Note: All the recommendations and the calculations are based on the closing price of 5 November 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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