Australian Agricultural Company Limited

A Quick Look at FY19 Performance: Australian Agricultural Company Limited (ASX: AAC) is a small-cap Australia-based cattle and beef producer with the market capitalisation of A~$687.15Mn as on 23^rd May 2019. Recently, the company has released its FY19 results wherein total sales revenue decreased by 15.6% to $364 Mn as compared to the prior year. As per the release, the premium branded beef strategy launch is going well, which was unaffected by extreme seasonal impacts. The Wagyu herd numbers have surged up to 3% on pcp basis. The extreme seasonal conditions have affected FY19 by $107Mn. There was an additional contribution of $60.4 Mn towards costs in FY19 in comparison to pcp because of drought condition. Theextreme seasonal conditions in Queensland and the Northern Territory had significantly increased the station operating expenses.

The company pointed out that operating expenses would increase with further deterioration of the season. The underlying operating profit, which excludes Gulf flood and Livingstone stood at $39.6Mn in comparison to $9.8Mn in pcp. Besides overall lower meat sales because of the suspension of Livingstone and 1824, the company still witnessed a rise of 4.5% on pcp basis in underlying Wagyu meat sales. AAC witnessed a significant rise in cattle sales and lower purchases because of Livingstone and 1824 decisions and adverse seasonalconditions.


Profit and Loss FY19 (Source: Company Reports)

Future Priorities: The company is planning to provide a consistent, high-quality supply with genuine provenance.With respect to branding and marketing, the company is taking a step to optimise go-to-market approach in targeted markets and to leverage the brand & marketing investment to drive revenue and margin growth.The company also stated that its focus on accelerating AACo strategic priorities.

Stock Recommendation: The company is progressing against its planned strategy and had continued its investment in skills and technologies that help to identify, assess and monitor genetic feed conversion and animal health data.
Additionally, it is also advancing its information systems to drive strategic decision making. With respect to stock performance, the stock has delivered a decent return of 3.17% and 26.67% in the span of one-month and three months, respectively. Based on the foregoing, we give a “Hold” recommendation on the stock at the current market price of A$1.160 per share (up 1.754% on 23^rd May 2019).
 

Select Harvests Limited

Crop and Market Update: Select Harvests Limited (ASX: SHV) is into growing, processing, packaging and marketing of almonds from the company owned and investor owned orchards with a market capitalisation of A$609.1Mn as on 23^rd May 2019. On 2^nd May 2019, the company published the crop and market update. In the context of crop update, the company stated that harvest was completed in late last week. High-quality crop along with a lower percentage of manufacturing grade material has been resulted by the ideal growing and dry harvesting conditions, new technology and improved horticultural practices.

Additionally, the introduction of new processing technology has resulted in better productivity within the orchards and the Carina West Processing facility.The domestic and export demand remains buoyantwith respect to inshell, kernel, and processed almonds. The sales and commitments for the currentcrop in Australia and US sales stood in line with market expectations. The company anticipates the average price to be in the range of A$8.40 – A$8.70 per kg in FY19. In another update, the company mentioned that Perpetual Limited and its related bodies corporate increased its stake in SHV to 10.45% from 9.43%.With respect to Almond division production costs, it is focused on productivity, technology and improved horticulture practices, which had resulted into reduced production costs per kg. Water costs had been offset by volume leverage, cost control, high almond prices, and additional hull and shell revenue.


Almond Volume Growth (Source: Company Reports)

What to Expect from SHV: The company is planning to optimise the almond base mainly by continuing its focus towards productivity and increased yields and by investing in Frost fans, water efficiency and technology adoption to mitigate risk. It is focusing on growing its brands by reinvesting in its key Lucky and Sunsol Brands and by executing growth opportunities in export markets.  

Stock Recommendation:SHV’s current ratio stood at 3.23x in FY18 in comparison to its industry median of 1.40x, which implies that the company is in a good position to address its short-term obligations as compared to the broader industry.

Asset to equity ratio stood at 1.41x in FY18 in comparison to the industry median of 2.01x and, thus, it looks like that the company’s assets are primarily being funded by the equities in comparison to the broader industry. In the span of three months and six months, the stock has generated a decent return of 3.57% and 12.92%, respectively. While on the YTD basis, it had witnessed a return of 3.74% and is trading slightly towards its 52-week high price of $7.490. By looking at the current trading level and steady volumegrowth in almond, we have a wait and watch view on the stock that trades at the current market price of A$6.280 per share (down 1.567% on 23^rd May 2019).   

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