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Trans Pacific Partnership would boost these five Agricultural stocks

Oct 08, 2015 | Team Kalkine
Trans Pacific Partnership would boost these five Agricultural stocks

Overview

The recent Trans-Pacific Partnership (TPP) agreement appears to benefit various agricultural stocks at the back of the possibility to have null or significantly reduced tariffs for agriculture products. The agreement also promises to promote policy reforms by efforts such as eradicating export subsidies, streamlining timelines with regards to restrictions on food exports. Overall, the agreement is set to expand trade of commodities among the TPP countries. In the wake of this, we believe the following stocks will be appropriate for good picks in said sector.

Australian Agricultural Company



Well positioned to leverage Asian market opportunity:
Australian Agricultural Company Ltd (ASX: AAC) is targeting the huge Asia’s rising  middle class to drive its growth which is estimated to reach over 3.2 billion by 2030 and the region’s food consumption is projected to double by 2050. Therefore, AAC invested over $91 million in the Livingstone Beef processing facility in Darwin during the fiscal year of 2015 and is also expanding its Northern beef products beyond live cattle export market. AAC reported a 42% year on year (yoy) rise of boxed beef sales during fiscal year of 2015, which accounted 77% of overall AAC revenues (as compared to 59% in 2014 fiscal year). With the stock falling over 18.4% in the last six months (as of Oct 6), we believe AAC shares offer attractive investment opportunity for investors looking for high potential stocks at bargain prices. Accordingly, we give a “BUY” recommendation at the current price of $1.32.


AAC Daily Chart (Source: Thomson Reuters)

Fonterra Ord Unit



Targeting eight markets to drive growth:
FONTERRA ORD UNIT (ASX: FSF) recently upgraded its estimates of farmgate milk price to $5-$5.1 kgMs for the fiscal year of 2016 and accordingly projects an earnings per share of 40 to 50 cents. Management reported that the global prices have been improving from July wherein the whole milk powder witnessed a rise of 44% while skim milk powder improved 21% during the period. To minimize the risk related to the volatile global prices and current tough market conditions, the group is also decreasing its milk production and accordingly estimates a 5% lower milk production. On the other side, Fonterra’s revenues fell by 15% yoy to $18.8 billion during fiscal year of 2015, due to lower milk prices despite sales volumes rise by 9% yoy to 4.3 million metric tonnes. But FSF improved its EBIT by 94% yoy to $974 million driven by better consumer and foodservice business during the second half on the back of enhanced ingredients business leading to better margins which offset the milk prices pressure. Accordingly its bottom line (NPAT) surged by 183% yoy to $506 million during the period. FSF is targeting New Zealand, Sri Lanka, Australia, Chile, China, Malaysia, Brazil and Indonesia to drive its potential growth as a part of its consumer and foodservice business. Subsequently, FSF invested over $230 million over the past two years to enhance its capabilities for better volume and value growth.
 

FY15 Performance (Source: Company Reports)

We believe these growth efforts would be paid off and the recent Trans Pacific Partnership would also underpin FSF growth efforts. The stock rallied over 7.5% in the last four weeks and we believe this positive stock momentum would continue and hence give a “BUY” recommendation at the current price of $4.88.


FSF Daily Chart (Source: Thomson Reuters)
 

Webster Limited



Positive Outlook:
Webster Limited (ASX: WBA) consolidated pre-tax profit fell to $8.6 million during the fiscal year of 2015 as compared to $11.9 million in the corresponding earlier year, due to costs related to purchase of the Kooba aggregation, Bengerang acquisition and Tandou takeover. Moreover, Field Fresh Tasmania reported a loss and the group offloaded this business during June. Therefore, the group’s Profit after income tax fell to $5.8 million against $8.3 million in FY 2014. Meanwhile, WBA harvested over 3,100 hectares of irrigated summer crop at Kooba which delivered solid cotton and corn yields. The group estimates cotton production of >100,000 bales and already implemented a forward sales of 40% of budgeted production at major premiums.

 
Webster Agriculture Locations (Source: Company Reports)

We believe that WBA group would continue its positive momentum, wherein the stock delivered a year to date returns of over 16.3%. Based on the foregoing, we give a “BUY” recommendation at the current stock price of $1.41.


WBA Daily Chart (Source: Thomson Reuters)
 

A2 Milk



Outstanding infant formula growth, targeting China among other regions:
A2 MILK FPO NZ (ASX: A2M) revenues surged by 40% yoy to $155.1 million in FY15, driven by solid infant formula growth. A2 Platinum infant formula rose over 650% driven by wide distribution across Coles, Woolworths as well as Independents and Pharmacy stores while the a2Milk fresh milk sales grew over 10% during the period. With regards to China market, the group launched fresh milk in China last year and the Shanghai team grew to eight as of August 2015. A2M intends to further expand its e-commerce opportunity in China along with brand development. As per the other regions growth, A2M reviewed its UK product format and accordingly intends to implement wider distribution. The group’s USA business performance continues to go strong and accordingly A2M intends to invest over USD 20 million from three years of launch. The company also announced about its move to raise $43 million through an underwritten sale of new shares to existing and institutional shareholders. This will help it to expand its sales of infant formula product in China, New Zealand and Australia. We believe that A2 would continue to build its IP, and further improve its opportunity by marketing the benefits related to the A2 protein.

 
Expanding China distribution (Source: Company Reports)

The shares of A2M rallied over 21% in the last six months and we believe that the group’s shares would continue to rally and based on the foregoing, we give a “BUY” recommendation at the current price of $0.65.


A2M Daily Chart (Source: Thomson Reuters)

Ruralco Holdings



Ruralco Holdings Ltd (ASX: RHL) reported a sales revenue growth of 36% yoy to $742.8 million in the first half of 2015 as the group’s network expansion efforts paid off, while its gross profit rose by 30% yoy to $149.7 million. RHL’s net profit after tax surged by 106% yoy to $10.5 million and accordingly the group improved its earnings per share by 61% yoy to 13.5 cents per share. The group’s rural supplies, agency and water services gross profit improved by 33%, 18% and 91%, respectively, on a year over year basis. The firm’s expansion into new sectors coupled with existing sectors growth offset Chinese dairy market volatility and decreased first quarter Indonesian permit provisions. Meanwhile, early rainfall in most of the cropping regions led to starting of seeding programs. Moreover, falling Australian dollar would continue to drive the export agricultural commodities. Management estimates continued demand for its meat and livestock. RHL also estimates a solid pipeline of live export in the coming months.
 

First half of 2015 performance (Source: Company Reports)

The shares of RHL delivered year to date returns of over 2.8% and rallied over 5.9% in the last four months. The group has a decent dividend yield of 4.7%. We give a “BUY” recommendation on the stock at the current price of $3.62.


RHL Daily Chart (Source: Thomson Reuters)

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.



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