18/09/2007 - 22:00

AWB a big-picture anomaly

18/09/2007 - 22:00

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The price of wheat is at an all-time high, the share price of AWB Ltd (once known as the Australian Wheat Board) is at an all-time low. Why is this so?

One answer is drought, and its debilitating effect on Australia’s wheat crop, which generates much of AWB’s fee income – no crop, no fees. Another is that AWB shot itself in both feet by doing dodgy deals when supplying wheat to Iraq.

A third possibility is the higher value of the Australian dollar.

But, the AWB massacre, during which the stock has plunged by 41.2 per cent from $4.20 to recent trades around $2.47, appears to be an anomaly that flies in the face of the big picture in world food – the rise of the so-called soft commodity producers.

Before looking at the ‘softs’ (which Briefcase started exploring a few weeks ago), it is worth comparing the wheat business with the mining business where sharply falling metal prices have not had a similar effect on mining company shares.

Take nickel as an example. It has plunged by 50 per cent during the past six months from around $US25 a pound to $US12.50/lb. The high was an anomaly that could never last, but as the price of nickel has reverted the share price of nickel stocks have not been hurt as much as might be expected.

Since June 30, the best of the local nickel stocks, Jubilee Mines, has actually risen 1.7 per cent, from $16.10 to $16.30, despite the sharply lower nickel price and perhaps because of exploration success. Other nickel stocks, such as Minara Resources Ltd and Western Areas Ltd, have fallen, but the falls are largely in line with what should happen when the price of your principal commodity declines.

Agricultural stocks, despite evidence of rising prices for just about everything we eat and wear, have received much harsher treatment, and the underlying reason seems to be that they have become foreign to most investors, who are more comfortable with mining stocks than farming stocks.

This is shown by two simple tests. First, there are (according to an unscientific head count by Briefcase) about 600 mining stocks on the Australian Securities Exchange. There are about 60 agricultural related stocks, many of no significance whatsoever.

Secondly, most stockbrokers do not research agricultural stocks because they have become a fringe investment sector, and under new securities laws a broker cannot recommend something he or she does not research.

In effect, we appear to have short-term influences pushing down the share prices of locally listed agricultural stocks such as AWB, Graincorp Ltd and ABB, while the long-term outlook is excellent because of increased grain use in producing biofuels, as well as bread and pasta.

Naturally, as always, this is not investment advice, but merely the idle thoughts of an old observer of markets, and the curious, multiple-layers of forces (and time) that determine short and long-term sentiment (and price).

In the case of AWB, there are undoubtedly major short-term pressures at work on the stock. It has been named and shamed. It is being hurt by the drought. But, as those issues pass, it remains one of the few substantial Australian companies listed on the stock market with its feet planted firmly in the land.

The wheat-trading monopoly, which has enabled AWB to behave like Telstra, and other private near-monopolies, is being stripped away from the company and it will in future have to fight for the right to sell wheat.

But one thing Briefcase has noted many times in the past is that inertia is a big factor in decision making, and while some farmers want to shift away from the national pool system of selling wheat, most do not. That should ensure that AWB retains a wheat marketing business of some sort (if farmers can produce a crop). On top of that there is the Landmark business it acquired from Wesfarmers, which makes it one of Australia’s biggest rural traders.

As an investment theory it is interesting to look at Australia’s love affair with mining stocks, because we’re enjoying a five-year boom set against the failure to yet recognise that ‘softs’ will be the next commodity sector to move. This is largely due to the creation of a new end-market for grains (biofuels) and the increased spending power of Asian consumers, who are developing an appetite for red meat and dairy.

•••

Now for a story of another stock that has been having a horrid time and it amuses Briefcase (tongue in cheek) to report that the people being hurt are mainly lawyers.

Integrated Legal Holdings Ltd, which generated a few brash media statements on its way to market (“IPO closes early and oversubscribed” – July 30) has been, to use a most unlegal term, trashed.

The company, which incorporates a number of prominent law firms such as Talbot Olivier and Brett Davies, was the latest attempt to “consolidate” a professional services sector.

Previous corporate creations have involved doctors and accountants, with the sales spiel for investors being that shared services will lower costs and provide exposure to the income generating power of the profession involved.

Not all of these businesses succeed, and while it’s early days in the life of ILH there must be a few glum faces (but not all) in the newly listed firm, which raised $12 million through an issue of 24 million shares at 50 cents a pop.

On its August 17 float day, which passed without a brash statement, Integrated Legal opened at 44 cents, and closed at 38 cents. To be fair, August 17 was about the worst day in years to list, though a 24 per cent haircut for subscribers to the initial public offer must have been a shock.

It gets worse. Late last week, as Integrated Legal marked its 20th trading day, the shares dropped to 26.5 cents – a 47 per cent haircut.

Perhaps (fingers crossed) better times arrived as Briefcase was dashing off to the printers. If not, then there are approximately 998 unhappy investors; that being the total number of shareholders on float day.

John Dawkins, chairman of Integrated Legal and a former member of the national parliament (and Australian treasurer) is listed as owning 1.6 million shares which were worth $800,000 at the float, but at last week’s low point were worth about $440,000.

Working out precisely who owns what, and how much something is worth is never easy. Brett Kenneth Davies, presumably the man behind Brett Davies Lawyers, which became part of Integrated Legal, is listed as owning 7.4 million shares in the Davies S/F A/C. Those shares were valued at $3.7 million originally, but are now worth about $2 million.

Of course, it’s not all bad news. As post-listing filings at the ASX note, vendors to the float – the law firms being integrated into Integrated – were paid $6,698,648 as part of the deal, leaving the new company with a pro-forma balance sheet of $5,188,726.

The solution to this interesting situation is for the lawyers in the floated firm to work jolly hard, get those billable hours up, and generate lots of profits to make the shareholders happy.

•••

“Torts are lawyers’ happy hours

Like double gins and fizz;

Spelled backward tort is trot,

Straight to the bank, that is.”

Art Buck

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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