07/06/2017 - 13:17

Offshore demand sparks rural revival

07/06/2017 - 13:17

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OPINION: Rural exports are on an upward curve, which is good news for the bush and investors in the agribusiness sector.

Offshore demand sparks rural revival
The eastern market indicator for Australian wool is up 20 per cent over the past 12 months. Photo: Stockphoto

Cotton, olive oil, Brazil nuts and wool may not appear to have all that much in common, but the record prices these commodities are achieving has provided another way of testing the mining-to-dining transition under way in Australia.

An even more interesting way of measuring the rural revival, and one that should catch the attention of stock market investors, is the record share price of Australia’s oldest rural services company – Elders.

Until a few years ago, the 178-year-old Elders business was teetering on the edge of disaster, the result of a toxic financial structure that included trying to carry a $1.4 billion debt load into the 2008 GFC.

From a share price approaching $3 before the crash, Elders sank to the status of penny dreadful with a price as low as 6 cents in 2013.

It’s a different company today, in several ways. The debt burden has been eased, profits are growing strongly and there’s talk of restoring dividend payments for the first time in 10 years.

The return of Elders is far more than a story of corporate revival after a near-death experience; it’s a comment on the powerful force of rising demand (and higher prices) for Australian rural exports, which are restoring an entire, and almost forgotten, section of the Australian economy.

Cotton is an interesting example. While not produced commercially in Western Australia, despite failed attempts in the Ord River irrigation area up to 1974, it is a big industry in parts of NSW and Queensland, with the latest forecasts from Cotton Australia suggesting the current season will be one of the best of the past decade.

With luck, always an important ingredient in farming, Australia’s cotton crop will catch a 20 per cent rise in the price over the past 12 months to around US77 cents a pound, though missing a surprise peak price of US87c/lb recorded in hectic trading in mid-May.

Olive oil and Brazil nuts are two other examples of a recovery in agricultural prices, albeit with the aid of a changing global climate. Brazil nut prices are up 60 per cent this year, largely the result of a drought in the Amazon region of Brazil. Olive oil prices in Europe are up 30 per cent thanks to drought in parts of Italy, Greece and Tunisia.

Wool, the lifeblood of large parts of rural Australia, traded up to near record prices earlier this year with the eastern market indicator (which reflects all wool types) approaching $15.50 a kilogram, before easing back to around $15.20/kg, which is still up 20 per cent over the past 12 months, and 55 per cent over the past two years.

A similar picture of rising prices can be seen in the beef market, thanks especially to Chinese demand for high-quality protein, a trend that has led some of Australia’s richest people to invest heavily in beef production.

Elders, with its interest in everything rural, is a yardstick for the health of Australian farming, which is why the recent surge in its share price to a high in late May of $5.02, up 30 per cent since the start of the year, is a significant development.

Much of the credit to revitalising a business that has touched the lives of generations of Australian rural (and city) dwellers must go to the new management team led by chief executive Mark Allison, who orchestrated a $57 million capital raising and new banking facilities in 2014.

That recapitalisation did precisely what it was designed to do – remove debt, clean up a disastrous class of hybrid shares, and position the business for a period of growth at precisely the right time.

Confirmation of Elders’ return came in the company’s half-year result released to the stock market on May 15, with profit up 56 per cent to $38.3 million, a performance that represents an attractive return on capital of 30.2 per cent.

There is limited research material available for investors with an eye on increasing exposure to the rural recovery story, largely because most investment banks have focused on mining and neglected farming over the past decade (or two).

In the case of Elders, a one-stop shop for rural exposure, Brisbane-based Morgans is the only mainstream stockbroking firm to follow the company, which it has been doing successfully since Elders’ financial reconstruction.

The most recent research from Morgans came after the half-year report from Elders when the stock was trading at $4.46, with the broker tipping $5.05 as the price target – a level almost reached just two weeks later.

What’s next for Elders, and the wider agricultural sector, is a continued recovery (drought and flood permitting) with the biggest potential event being restoration of the annual dividend, which Morgans reckons will be 13 cents a share declared later this year, with more to come as profits rise.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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