Tag Archives: Agriculture

article 3 months old

Weekly Broker Wrap: Earnings, Apartments, Consumer, Wellard And Telstra

Earnings season wrap up; apartment approvals spike; consumer spending growth; harsh outlook for Wellard; Telstra's dividend dilemma.

-Ord Minnett scales back financials and health care, increasingly favours metals & mining
-UBS suspects market vulnerable to a set back but any correction likely to be shallow
-Developing oversupply of apartments to gain momentum in 2017 and 2018
-Weaker wealth trend seen reducing spending growth in 2017
-Wellard in breach of facilities and may be forced to sell assets
-Does Telstra need to change its dividend policy?
 

By Eva Brocklehurst

Reporting Season Wrap

Ord Minnett is disappointed with reporting season. FY17 earnings projections have slipped by 1.3%, and only 24% of the S&P/ASX 200 index beat expectations for FY16. The broker has scaled back its position in financials and health care, after the two sectors fell 2.5% and 3.7% respectively in the month.

In contrast, Ord Minnett observes the metals & mining sector is increasingly favourable and moves its weighting to Neutral. The broker is also encouraged by the positive aspects of the consumer discretionary sector and reinstates it to Overweight.

The broker contends that two stalwarts of the yield play have languished, with telecommunications edging out insurance to claim the wooden spoon. Ord Minnett observes the slide in utilities in the month also looks to be underpinned by fundamentals with AGL Energy ((AGL)) exerting the most drag, and its FY17 earnings estimates scaled back 3.5%.

Meanwhile, energy was resilient, up 2.8%, and materials and staples were up 1.9% and 2.6% respectively in the month. The broker shifts its materials weighting to Neutral and remains Underweight on staples.

UBS suspects a degree of complacency has crept back into the investment landscape and the market could be vulnerable to a setback. Nevertheless, recession risks for the US and Australia are low, in the broker's opinion. Hence any correction may again be shallow and present a buying opportunity.

The broker remains cautious, but not outright bearish, about the market and continues to believe stocks offer better prospects than bonds and cash on a 6-12 month view. UBS is, on balance, underweight on the defensive yield trade, envisaging it is overvalued versus other parts of the equity market.

The broker considers the market is likely under-pricing a tightening from the US Federal Reserve. Still, the Fed remains constrained by a lacklustre global economy and any bond yield back up is expected to be moderate.

Australian Apartments

Building approvals sustained the largest monthly rise in 2.5 years in July, Citi notes, and the gain was led by NSW, followed by Western Australian and then Queensland. The broker also observes the rise was completely driven by a large spike in apartments, extending the trend in the medium and high density segment of the market. It also underlines the emerging trend of softly falling owner-occupier approvals on the headline result.

Citi suspects the risk that a number of approvals do not turn into dwelling starts is growing. Apartment completions lag starts by 1-2 years so the developing oversupply should continue to build in 2017 and 2018, with the broker estimating completions will probably double across the eastern states.

Relative to underlying demand, Brisbane is considered oversupplied as is inner Melbourne. Sydney is still catching up and the broker can only suspect that the underlying demand in Sydney is able to absorb such a large impact from building approvals in the supply chain.

Citi does not envisage conditions are sufficient for contagion from projected apartment price declines in some areas to spill into broader house price declines.

Wealth And Consumer Spending

UBS argues that the pick-up in consumer spending since 2013 is sustainable and, so far, solid jobs growth and better consumer cash flow from low inflation have driven stronger real spending, despite low wages growth.

UBS updates its model to calculate how a flatter outlook for housing & equity prices, and record low wages growth, weighs on the consumer, despite recent reductions to interest rates. The lagged impacts of this weaker wealth trend is conspiring to drag spending growth lower in 2017, in the broker's opinion.

Hence, UBS trims consumer growth forecasts to 2.5% from 2.8% for 2017, with 2016 little changed at 2.9% from 3.0%. For retail sales, a near-term boost to household cash flow from lower petrol prices, tax and rate cuts should mean a return to the growth range of 4-5% from the current level under 3%.

Wellard

Deutsche Bank downgrades Wellard ((WLD)) to Hold from Buy in the wake of the FY16 results, which signalled the company is in breach of its working capital facility and may be in breach of certain financial covenants. The broker reduces the target to 30c from 75c. Deutsche Bank observes that earnings have been affected by the inability to pass through the historically high cattle prices to traditional customers in Indonesia and Vietnam.

Morgans observes, should Wellard be unable to renegotiate its loan facilities, the business will not continue as a going concern and it may be forced to sell assets. Given conditions have deteriorated further in FY17, the broker has little confidence in forecasts. Morgans maintains a Reduce rating and considers the stock a high-risk investment. Target is 25c.

Telstra

Credit Suisse believes Telstra ((TLS)) has an emerging dilemma over its dividend. The earnings gap as NBN payments roll off is rapidly approaching and will result in core recurring earnings per share (EPS) falling significantly over the next 2-3 years. This core EPS is forecast to fall as low as 23.2c per share in FY19.

Credit Suisse maintains that if Telstra sticks with its current dividend policy, the dividend would likely need to be cut in the outer years. If Telstra changes its policy and pays a dividend above EPS for a period, earnings from areas such as mobile and network access could have time to catch up with the pay-out, the broker contends.

There is no near-term dividend risk, as NBN payments should support cash flow and reported earnings, but Credit Suisse envisages dividend sustainability will start to worry investors in the medium term. Moreover, history shows that Telstra's yield tends to rise, ie the share price declines, when there is concern about the long-term sustainability of its dividend.
 

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article 3 months old

Weekly Broker Wrap: Aldi, Oz Equity, Builders And Aged Care

-Coles best at countering Aldi
-Oz market driven by PE re-rating
-Difficult investment case in building
-Confidence in aged care continues
-Maiden FY17 profit expected from NAN
-HUO benefits from major supplier problems
 

By Eva Brocklehurst

Aldi

Is Aldi unstoppable? This is the question UBS asks in assessing the opportunities in Australia for the disruptive supermarket chain. Based on its analysis, Aldi appears to be obtaining new customers at an accelerating rate. Driving the lift in penetration is increasing volumes of wealthier shoppers.

Despite this feature, the chain's share of basket has fallen, as shoppers express a view that Aldi is good for some things but not a main shop. The fresh category appears to be the main impediment to Aldi lifting its share of main shopping trips.

UBS expects Aldi will reach $10.6bn in sales by 2019, equivalent to a 15% compound growth rate and a doubling of sales since 2013. This will be supported by like-for-like sales growth of 3.0% per annum, further roll-out in the east coast and new regions in South Australia and Western Australia.

UBS forecasts, as a base case, Aldi's market share reaching 10% by 2019. The broker believes Aldi is winning sales from all retailers, but its like-for-like growth has slowed over the past 12 months driven by the “Every Day Value” strategy from Coles ((WES)).

Coles is judged to have grown both trips and share of main shop among Aldi shoppers over this period. In contrast, Woolworths ((WOW)) has seen both measures deteriorate. This suggests to UBS that Coles has been successful in minimising its share loss to Aldi. The broker also notes that even the independent grocers appear to have benefitted from the issues at Woolworths.

Australian Equity

Australia has outperformed global peers in the past six months and the market is up more than 10% from its February lows, Deutsche Bank observes, and this is largely driven by a price/earnings (PE) ratio re-rating rather than earnings. The stocks are now seen becoming a little expensive.

Resources appear to have driven a lot of the rise, with improved momentum in China. While high PE stocks have been key contributors, Deutsche Bank notes the PE re-rating has been largely in stocks which were not expensive relative to others in 2015 but broke away in 2016 to be 15% more expensive relative to history.

In screening defensive stocks and ranking them in terms of PE ratio relative to a six-year average, earnings revision momentum and dividend yield the broker highlights AGL Energy ((AGL)), Suncorp ((SUN)), Healthscope ((HSO)) and Stockland ((SGP)). Others that screen attractively are Coca-Cola Amatil ((CCL)), Estia Health ((EHE)), Mirvac Group ((MGR)) and Duet ((DUE)).

Builders

A more normal housing market is developing, Macquarie contends, compared with the conditions in 2015 when the fear of missing out featured in consumer behaviour. Underlying demand still is firm, despite some evidence of a pre-election lull emerging. The broker notes affordability remains an issue but positive fundamentals are underpinning growth.

In canvassing builder viewpoints the broker notes a peak in construction activity is still in the future with all citing good visibility for the next 12-18 months. Consulting engineers were starting to see a slowing in the early stages of the supply chain. Supply constraints are also broadening. While bricklaying capacity was under pressure a year ago this seems to have been alleviated.

Trades in short supply now include painters, formwork and joinery. In terms of the location, momentum in NSW is on par with 2015 while there remains some strength in pockets of the regional markets, the broker observes. One participant reported increasingly buoyant conditions in Queensland and expressed confidence in the Victorian detached market.

Materials pricing appears to be growing 4-6%. The overall investment case remains difficult, Macquarie maintains, as cyclical risks continue to grow. The broker continues to prefer offshore exposure with James Hardie ((JHX)), and maintains an Underperform rating on CSR ((CSR)) and Brickworks ((BKW)).

Aged Care

UBS is encouraged by the long-term prospects for the aged care sector despite the short-term earnings pressure. The broker calculates that a bed shortage over the next two years will drive occupancy rates up 200 basis points and occupancy is not expected to fall below 93% before 2020.

The broker expects financial pressure from the 2016 federal budget will stymie bed growth, with the larger operators continuing to invest but the smaller end likely to reduce planned investment as a means to conserve capital.

Industry operators are likely to react to the government's cuts to funding by increasing the co-payment for residents, via accommodation payments and additional services charges. UBS expects the tight supply will mean residential accommodation deposits (RADs) will continue to show strong value appreciation and suspects estimates of 5% annual growth are looking increasingly conservative.

Morgan Stanley expects low organic growth, noting the listed operators are confident that additional services revenue, scale benefits and cost management will partly offset the lower government funding and enable margins to be maintained. Still, the broker incorporates a small amount of negative leverage into its base case.

The broker observes there is a fair amount of time to deal with the budget changes but remains cautious and desires more confidence that the strategies to manage the difficulties in the sector are working.

Morgan Stanley prefers Aveo Group ((AOG)) in the sector, as the company is most advanced with its strategy in Australia, having had success previously in New Zealand. The broker also expects higher returns over the long term if the Aveo Way contract with Stockland becomes the norm, although does not incorporate this into its base case.

Nanosonics

Nanosonics ((NAN)) has now established Trophon as the standard of care for high level disinfection of ultrasound probes in Australia and Bell Potter observes it is quickly reaching a similar status in the US. The installed base of Trophon in the US is approaching 25% of the market.

The company is expected to generate a maiden full-year profit in FY17. Beyond the US and Australia a start has been made on key markets in Europe and the broker anticipates revenues will accelerate as the regulatory environment changes to embrace the broad adoption of Trophon.

The company is not expected to require further cash from shareholders, given Bell Potter expects it to be positive on cash flow in FY17, but the broker cautions that the investment does warrant a higher risk rating than more established industrial stocks. Bell Potter initiates with a Buy rating and $2.25 target.

Huon Aquaculture

A contraction of salmon biomass at sea in Norway and Chile, where major suppliers are confronted by algal blooms, sea lice and lower stocking rates, has resulted in a material contraction in global supply. Production is forecast to be down by 5-8% in 2016.

Huon Aquaculture ((HUO)) generated 90% of its revenue in export and domestic wholesale markets in FY15 which Bell Potter notes is where pricing has had a reasonable correlation to global import parity levels. Hence, the broker envisages Huon Aquaculture providing leverage to the continued improvement in global salmon prices.

Bell Potter retains a Buy rating, which it believes is supported by the completion of a significant investment in the asset base to deliver growth towards 25,000 tonnes of fish and a reduction in operating costs from the benefits of the recent capex program, as well as a more favourable pricing environment. The broker's target is $4.05.
 

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article 3 months old

Downgrade Sours Outlook For MG Unit Trust

-Still pursuing higher value products
-Taking on additional debt
-Uncertainty over CEO, CFO departure
 

By Eva Brocklehurst

Dairy co-operative MG Unit Trust ((MGC)) has been overly ambitious in its forecasts, downgrading FY16 guidance to the disappointment of brokers and unit holders. The chief executive and chief financial officer have also resigned following the downgrade.

Morgans maintains the downgrade is particularly poor given management's recent comments to ASX and the press about there being no material impact stemming from China's regulatory changes, and in the light of the progress being made on its dairy foods strategy as well as the signing of a five-year private label contract with Coles from January 2017.

Macquarie on the other hand is less concerned, attributing the downgrade simply to over-optimism in relation to milk power sales to China. The broker does not believe the downgrade signals a material deterioration in the company's strategy of pursuing higher value dairy products.

Moreover, the company has taken a conservative stance on milk powder sales in FY16 and growth is still expected to occur going forward. The inventory revaluation due to lower milk prices, is also expected to reverse as the product is sold in FY17, Macquarie asserts.

The company’s available southern milk region farmgate price is expected to be $4.75-5.00 per kg, down 13%, equating to net profit of $39-42m from the previously expected $63m. The revised guidance is attributed to lower-than-expected second half adult milk powder sales in China, a higher currency and non-cash inventory write-downs. Sales of adult milk powder have been downgraded to 28,000 tonnes, given the reduced demand.

Still, Morgans observes unit holders are not impressed with the need to take on additional debt to fund a milk supply support package. The milk supply package is designed to assist farmer cash flows and to protect future milk supply. It will allow the company to pay suppliers the cash equivalent of $4.47 kg in FY16 and net debt is expected to rise by $95-165m.

While debt will increase over coming years the banks have signalled their support and the broker accepts gearing remains within policy guidelines, while growth projects are underpinned by long-term contracts.

The company still expects to fund its planned investment in cheese, dairy beverages and nutritional powders, which Morgans acknowledges are higher-margin growth projects, largely underpinned by take or pay contracts. Cash flow from these project is expected to be used to pay down debt over time.

Macquarie is mildly concerned about the support payments as it creates some risk of loss of supply, but acknowledges other processors may not be chasing milk given current commodity prices. The broker retains an Overweight rating, while reducing the target to $1.70 from $2.60, as the positive long-term outlook is intact. Macquarie reduces forecasts for FY16 by 36% and FY17 by 14%.

The stock may be oversold but, until a new CEO and CFO are appointed and there is clarity on the forward strategy, Morgans downgrades to Hold from Add. The broker reduces FY17 earnings forecasts by 35.8% and forecasts FY17 profit growth of 18%, underpinned by improved dairy prices, a slightly lower Australian dollar, the new Coles cheese contract and a full contribution from infant formula.

Morgans suspects it will take time for confidence to rebuild, but in its favour the company has a strong brand and remains Australia's largest dairy producer, leveraged to improving industry fundamentals. Moreover, it offers an attractive dividend yield. The broker has a target of $1.38, reduced from $2.30.

David Mallison, formerly the executive general manager of business operations, has been appointed interim CEO. Morgans believes the changes demonstrate the board's willingness to take action against underperformance, a first step in turning around the operations.

Still, there is a lingering concern new management may uncover other internal/accounting issues which have not been addressed. Macquarie accepts management uncertainty is likely to overhang the stock but believes the acting CEO is well regarded.

Meanwhile, farmers continue to be affected by depressed global dairy prices and below-average rainfall in key regions, which has reduced pasture growth. In an environment where many dairy farmers are losing money prices will need to rise at some point or Morgans believes supply will materially contract. Industry forecasting bodies are expecting a recovery in dairy prices later this year.
 

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Weekly Broker Wrap: Aquaculture, Slots, Retail, Sharing Economy And Investment Strategy

-Balanced outlook for salmon
-Aristocrat likely to retain dominance
-China tax policy tempers tourist outlook
-International retailer assault to continue
-Property services negative re sharing economy
-Australia a preferred market for investment
 

By Eva Brocklehurst

Aquaculture Producers

Tassal Group ((TGR)) has withdrawn from domestic retail supply tenders to Coles, indicating to Credit Suisse a previously signalled unwillingness to tender at sub-optimal levels relative to other channels.

The broker was surprised, nonetheless, that the entire contract to Coles changed hands. It appears Petuna has secured the fresh deli contract. Credit Suisse does not believe the Simplot contract has been finalised yet but expects it to go to Huon Aquaculture ((HUO)).

Tassal has also noted supply restrictions and increased pricing as a result of the impact of the long hot summer, which Credit Suisse believes applies to all operators. Importantly, while growth has been affected, mortality levels have not.

The broker reduces expectations in terms of volumes and margin assumptions, with a negative earnings revision for Tassal of 5.0%. Gaining additional retail exposure is considered a positive for Huon, as is reduced competition in wholesale channels. The broker considers the industry supply and demand outlook is increasingly well balanced.

Slot Machine Makers

Macquarie's analysis suggests Aristocrat Leisure ((ALL)) has continued to take market share at the expense of Ainsworth Game Technology ((AGI)). The broker notes patent applications and absolute R&D spending signal Aristocrat can maintain its dominance.

Both companies have strong balance sheets and liquidity which, combined with increased annuity earnings, suggests to the broker that compared with global peers, the Australian manufacturers are likely to increase ship-share in both Australia and North America.

Macquarie upgrades Aristocrat to Outperform (from Underperform) as the trends are clearly supportive form an earnings and sentiment perspective. The broker downgrades Ainsworth to Underperform (from Outperform) as in contrast, market share and momentum are considered headwinds.

McGrath

Bell Potter considers it appropriate to compare real estate business McGrath ((MEA)) with offshore listed comparables rather than other consumer facing stocks in Australia, as none of these operate within the Australian residential real estate market.

Key offshore peers include Realogy, Foxtons and Countrywide. The broker notes the price/earnings ratios for these stocks on FY16 and FY17 forecasts are well above the average for McGrath.

Bell Potter retains a Buy rating and $2.25 target and continues to believe the company will at least achieve its pro forma prospectus forecasts in FY16, believing it undervalued in both a relative and absolute sense.

Australian Retail Property

New Chinese tax policies could temper the outlook for tourist oriented shopping malls, Morgan Stanley contends. New taxes for cross border e-commerce and international parcel deliveries become effective on April 8.

The broker suspects stricter enforcement and increased scope and quantum of the tariff on imported goods could reduce demand for goods purchased from offshore and outbound tourism.

Tourist exposed centres account for around 20% of the Australian Real Estate Investment Trust retail stock. GPT Group ((GPT)) has the highest exposure by portfolio value, Morgan Stanley observes. Vicinity Centres (VCX)) has the largest number of malls.

With redevelopments increasingly relying on the introduction of new luxury retailers the broker questions the potential risk/reward of future development activity.

Discretionary Retail

Macquarie has analysed the recent financial performance of the international retailers H&M, Zara and Uniqlo. Cumulatively these earned $460m in sales across 29 stores in their latest financial year results. They continue to add competitive pressure to the department and discount department stores as the majority are co-located.

Sales of the three have deteriorated from initial elevated levels, Macquarie observes, with some cannibalisation and lower sales productivity expected as they expand into the suburbs from more productive CBD locations. Still, the broker does not expect this to deter the continuing trend of offshore retailers entering the Australian market.

In terms of the listed property sector, these international stores are typically anchoring retail development activity in Australia, the broker notes, and taking market share away from domestic retailers.

The broker is concerned about the impact, given their typically low price points, which means domestic competitors cannot raise prices to offset the cost of goods impact of a lower Australian dollar. Increased financial stress is considered likely in domestic specialty apparel chains.

Moreover, international retailers are receiving generally lower rents and higher incentives which will continue to hinder shopping centre development returns in Australia. That said, the cost of doing business for these retailer in Australia is expensive, and returns are expected to moderate.

Sharing Economy

This is a rapidly growing economic model based on access to, rather than ownership of, physical and human assets such as time, space and skills. Examples are Airbnb, where people can list and book accommodation, and Uber, the ride sharing application.

Advances in technology, spearheaded by the internet, have enabled the economy to grow. As a result, some traditional business models have been disrupted while for others it provides a cost effective platform with which to compete.

Among the key findings of the National Australia Bank's report on the sharing economy, the analysts note that while large firms are the most positive about the impact, small firms are the most confident going forward. This may reflect the fact large firms have a better understanding of the sharing economy, as none of them signalled a lack of knowledge.

Small firms operating in the health services and construction industry indicated a lack of knowledge about the impact of the sharing economy on their business. Overall, around one in 10 Australian firms believe the sharing economy had an impact on their business over the last 12 months.

Businesses operating in the property services industry were the most negative in regards to the impact followed by retail businesses.

Investment Strategy

Participants at Credit Suisse's Asian Investment Conference were bullish regarding the short term but cautious for the long term. The broker suspects Chinese stimulus measures have caused many investors to re-assess their near-term outlook as there remains a considerable overhang of debt and an unbalanced economy.

Australia is now a preferred market in the region but investors are cautious regarding materials and financials stocks, which make up two thirds of the benchmark. The broker observes foreign investors are not smitten by the sector mix in Australia but suspects they want to gain exposure to the appreciating currency and the highest dividend yields in the region.

The relevant presentations at the conference for Australian investors included evidence that VIP gaming volumes in Macau should gradually recover. The acquisition criteria for the Hong Kong Exchange suggests to the broker it would not be interested in ASX ((ASX)) while Singapore Telecom's Optus is looking to differentiate its business in Australia via content. The recent acquisition of English Premier League rights for Australia is part of this strategy.
 

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article 3 months old

Healthy Outlook For Wellard Live Cattle Exports

-Defects, delays to vessels in H1
-Live export markets being opened up 
-Need to establish track record to re-rate
 

By Eva Brocklehurst

Livestock exporter Wellard ((WLD)) has disappointed brokers, with its first half results affected by restructuring to a public company, manufacturing issues for two of its vessels, and IPO-related costs. A strong US dollar also affected depreciation and interest expenses on translation.

Still, revenue was in line and the live cattle market remains buoyant. The company has executed its agreement with China's Wellao JV and the design of the feedlot facility has now been completed, with construction to start in the June quarter. The company is also looking at new markets in Turkey and Israel.

Full year earnings guidance is reduced to $42.5m from $46.4m. While this downgrade is disappointing, Deutsche Bank, reducing its forecasts by 3-9%, concedes it reflects the short term impact from a delay in commissioning of the ocean going Shearer vessel and repair costs and outages for the Swagman and Outback vessels, which are expected to return to the fleet this month.

The broker’s Buy rating is supported by increasing capacity and consumption of beef, lamb and dairy in Asia and, of note, the stock is trading at a 48% discount to an average of Australian agricultural peers on FY17 earnings estimates. The second half is expected to be better, although it will be subject to seasonal conditions in animal sourcing areas.

Indonesia import quotas appear positive in the first quarter of 2016, although Deutsche Bank notes some confusion as to whether the quota is three or four months in duration and, while not the desired annual outcome, the increase provides more certainty for graziers.

The broker believes it is too early to determine the impact of Indonesia’s new tax on the import of non-productive cattle but the additional uncertainty has potential to disrupt demand in the short term as butchers may defer purchases to protest the new tax, as has occurred in the past.

Meanwhile, the company expects the cattle price to continue to ease and cattle availability improve, as recent rainfall in Queensland and the Northern Territory was not sufficient to withhold stock.

The company is also looking to diversify supply to Brazil, Uruguay and Colombia and expects to establish live export protocols with Colombia and Vietnam. The new Kelpie vessel design has been completed and construction should start shortly with commissioning in FY18.

Morgans acknowledges the earnings downgrade is based on factors such as vessel repair – a manufacturing defect and not a maintenance issue from Wellard's end – which are short term. However, the broker asserts the delay in Shearer's commissioning – blamed on labour supply - should have been accounted for in prior guidance.

Over coming years the stock offers a strong earnings growth profile from its exposure to favourable industry dynamics but, as the stock has disappointed since listing, the broker suspects it will take some time to re-rate and needs to deliver on its forecasts and growth projects.

Earnings are skewed to the second half because of the timing of Asian religious festivals and the broker suspects this skew could be greater than usual this time. The company did not declare an interim dividend, intending to declare one at the full year result, with directors targeting the upper end of the 30-50% pay-out range. Morgans assumes the dividends are 50% franked, given Wellard pays minimal tax.

Wellard formed from WGH Holdings, purchasing some but not all assets of that private company, making comparisons to the past difficult. Key risks to forecasts, Morgans believes, centre on further delays in the commissioning of Shearer and the implementation of the live export protocol with Columbia and Vietnam, given Wellard has budgeted on one shipment in FY16.

Nevertheless, the broker expects strong profit growth to ensue based on healthy demand, a lower Australian dollar and oil price, and the ability to capture more margin from sourcing cattle directly. The exporting margin has been affected by a scarcity of cattle in northern Australia, which UBS suspects eliminated the benefits of lower fuel costs in the half.

The broker remains confident that the company can compete against export-focused Australian abattoirs but margins may not recover in the near term. While processed exports have a stocking density benefit versus live exports this is more than outweighed by lower feed and processing costs and higher revenue under a live export model.

The broker notes the industry commentary that there is a potential for live exports to China to be 1m versus the 1.3m in global exports from Australia in FY15. The feedlot in China should be commenced in June with first shipment expected in September. UBS forecasts a ramp up to 150,000 head of cattle exported by FY19, with further upside potential beyond this date.

Wellard currently accounts for 27% of Australian live cattle exports, operating four vessels with another two under construction. FNArena's database shows three Buy ratings. The consensus target is $1.50, suggesting 78.6% upside to the last share price. Targets range from $1.40 (UBS) to $1.65 (Deutsche Bank). The dividend yield on FY16 forecasts is 3.1% and 6.4% on FY17 estimates.
 

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article 3 months old

Brokers Sniff Sweet Potential In TFS Corp

-Strong potential in new contracts
-Move from farm management to sales
-Pharmaceutical opportunity
 

By Eva Brocklehurst

TFS Corp ((TFC)) has new arrangements with Asian buyers of its Indian sandalwood that are set to absorb the next five years of supply currently controlled by TFS.

Brokers brushed aside a strong first half result to highlight the potential of these contracts. Alongside the pharmaceutical contract with Galderma, TFS has contracts for 150 tonnes of heartwood to a Chinese wood customer and 30 tonnes to an existing Indian customer, as well as over a tonne of oil to a fine fragrance customer.

TFS has now forward-sold all its owned production for the next two years. Canaccord Genuity believes this situation significantly de-risks the business and the investment thesis. The company has moved from a pure plantation manager to a product distribution company that should generate lucrative cash flow for shareholders.

TFS has multi-year agreements with Chinese and Indian buyers of heartwood at prices similar to the Galderma deal, at around US$4,500/kg oil. Exact pricing depends on the quality and quantity of the heartwood delivered.

Supply over the next six years is expected to average around 300 tonnes per annum of heartwood. This is, in turn, expected to generate annual revenue of over $70m at more than 90% gross profit margins. Cannaccord Genuity highlights the lucrative nature of the asset base with an estimated all-in production cost of $500/kg over 15 years. Earnings are expected to increase 5-10% in FY16.

The loan book is currently at $38m and is expected to convert to cash in the current half. Going forward, Canaccord Genuity expects third party financing of retail grower loans will remove the funding requirements on the balance sheet through a cumulative build of a loan book through Arwon Financing.

TFS is currently seeking to secure third party funding of the 2016 retail product. This will significantly improve the earnings quality of the business, the broker contends. Plantation sales for FY16 currently stand at 1,000 hectares, up 50% on FY15. This is the highest level of forward sales in the company's history.

The company's contract with Galderma, a subsidiary of Nestle, has launched its sandalwood oil, a long-time ingredient in perfumery, into the therapeutics industry. Around 1m Benzac units, the Galdema over-the-counter acne medication, were shipped in the December quarter, representing a threefold increase in royalty payments to TFS.

The continued development of the company's pharmaceutical subsidiary has potential to be worth more than its plantation management business, in Canaccord Genuity's opinion. The broker suspects the company will validate this value through a minority listing on a foreign stock exchange in due course. Canaccord Genuity retains a Buy rating and $3.24 target.

Moelis is a little more circumspect regarding the financial and commercial impact of Benzac royalties but agrees the signing of additional supply agreements de-risks the demand expectations and yield assumptions to be realised over coming harvests.

The signing of multiple supply agreements for 60% of the 2016 harvest is a positive reflection on medium-term demand, in the broker's view, particularly give uncertainties in the past. The Chinese and Indian agreements provide further quality and diversity for longer term demand. The broker's near-term forecasts are based on the 2016 harvest, timed to contribute to FY17 earnings. A Buy rating and $1.95 target are maintained.

UBS uses a long run sandalwood oil prices of US$2,800/kg in its estimates but envisages upside risk to this forecast, should the Chinese and Indian wood market embrace the TFS product. The broker also notes new pharmaceutical trials such using the oil for skin warts. TFS expects at least one new pharma product containing its Indian sandalwood oil in 2017.

The attraction in the stock is based on Australia’s relative geopolitical risk advantage, and the long lead time to sandalwood production which has resulted in widespread illegal harvesting of sandalwood around the world.

The tree is very difficult to grow being semi parasitic and TFS has a first mover advantage of around 20 years, in the broker’s opinion. Production is forecast to increase by more than 20 times over the next 10 years. UBS retains a Buy rating and $3.25 target.
 

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article 3 months old

Tassal’s De Costi To Underpin Outlook

-Risks in contract renewals
-Competitor activity pressures prices
-Strong market growth ahead
 

By Eva Brocklehurst

Another broker has taken to the Tassal Group ((TGR)) observation decks, as Australia's largest vertically integrated producer of salmon has now broadened into other seafood through the acquisition of De Costi Seafoods.

This acquisition underpinned the numbers in the first half as excluding De Costi, earnings were flat. The integration of De Costi increases Tassal's addressable market to $4.3bn, annually.

Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, initiates coverage with a Hold rating and $4.30 target. This is based on a valuation which offers modest upside to the current price amid risks around upcoming retail contract renewals and pricing pressure.

Retail supply agreements with Coles and Aldi mature this year and there is a risk supply is awarded to competitors, or on less favourable terms. Major competitor Huon Aquaculture ((HUO)) is ratcheting up its harvest and this may have a downward impact on prices, Moelis suggests.

Nevertheless, the Australian salmon market is forecast to grow at 10% per annum until 2020 and Tassal is automating its supply chain which should improve volume and margins over time. Capital expenditure for the next few years is in the range of $45-55m, Moelis observes. The company is also at an advantage over other foreign players as its salmon is typically of higher quality, with less antibiotics and better husbandry.

Domestic consumption of salmon continues to climb, based on increased awareness of the health virtues and the availability of convenience packs. The scale of aquaculture also is increasing, which provides more consistent product at lower prices.

First half results were weaker than Morgans forecast but growth is expected to be stronger in the second half on the back of the De Costi synergies. The broker suspects the mention of pricing pressure on retail contracts in FY17 may have spooked the market, downgrading to Hold from Add in view of the limited upside to its $4.20 target.

Ord Minnett suspects the market was also disappointed with the pull back in disclosure on salmon pricing and volumes and may have expected a more optimistic outlook based on the increase in export prices. Yet the broker retains a Buy rating, believing De Costi is on track to deliver a significant contribution.

On the subject of disclosure, Moelis highlights the company's intention to present the business as a whole rather than segmented via salmon and De Costi and, with the number of contracts up for tender this year, has not provided key operating metrics in order to protect commercially sensitive information. The decision makes it harder to assess and forecast operations.

The broker also notes that despite a primary focus on the domestic market, significant increases in the international price and a weaker Australian dollar render the export market as a profitable channel.

Morgans also believes the company will benefit from favourable export market conditions in the second half as well as the synergies from De Costi. The broker calculates an average retail price per kilo of around $13.44, down from $13.77 in the prior corresponding half. The average wholesale price is calculated at around $11.85/kg, down from $13.29/kg.

Although Tassal does not itself export, when export prices increase the companies major competitor often exports larger volumes, freeing up supply in the domestic wholesale market. Export prices have risen 25% in Australian dollars per kilo since the end of June 2015. Despite this, Tassal expects wholesale prices to remain stable.

Ord Minnett is puzzled by this, having expected a stronger outlook. The broker suspects a mismatch in export and wholesale pricing because of an oversupply in the domestic salmon market, despite some volume being exported. In the first half an extra 3,500-4,000 tonnes was released into the wholesale market by a competitor. Od Minnett suspects the market could remain slightly oversupplied for the next few years.

Credit Suisse expects FY16 earnings will be flat, with retail pricing weaker and fish meal prices rising. Still, the broker retains an Outperform rating and believes the stock is reasonably priced, given its track record and improved domestic conditions.

The broker does not agree with the decision to reduce disclosure on salmon farming metrics. While this could be viewed as raising a warning flag, Credit Suisse does not believe it offsets other positive investment attributes. Considering the recovery in wholesale prices and a lower import threat, Credit Suisse believes conditions are better than they were 6-12 months ago.

FNArena's database shows two Buy ratings and one Hold (Morgans). The consensus target is $4.40, suggesting 9.2% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 4.0% and 4.5% respectively.
 

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article 3 months old

Upside For Capilano

By Michael Gable 

This week is a busy one with companies reporting. The earnings backdrop is weak and down here a lot of negativity is priced in. We do see the other side of the coin though. We realise that there are also positives such as strong employment, a weak dollar, low oil and interest rates etc. This means that as long as companies on average do not further disappoint an already fearful market, then we can see some stronger support come in at these levels.

We recognise that the Australian market is not hugely cheap, but seasoned investors know that its only a matter of time until the coin flips over from fearful to greedy. And sounding like a well-worn record again, it is the stocks that display a quality result and come in-line or above expectations that will do well. In today's report we look at the chart for Capilano Honey ((CZZ)).
 


The last six months has seen CZZ consolidate the great run that it had in the prior two years. There seems to be plenty of support under $18 and price action is forming an ascending triangle. With a market beating report yesterday, we expect CZZ to bounce off support here and head back up towards resistance near $23. Only on a break of that resistance level would we expect CZZ to continue upwards and resume the uptrend.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Brokers Buzzing Around Capilano

-Higher prices, increased demand
-Asian exports up strongly
-Vertical integration strategy
 

By Eva Brocklehurst

Brokers are buzzing around Capilano Honey ((CZZ)). The company's first half result beat broker forecasts substantially, with profit up 53%. This may have mostly reflected a stock re-valuation because of higher honey prices and increased demand. Nonetheless, the outcome is considered unquestionably strong. Honey is increasingly popular in health remedies, a benefit the company enjoys both domestically and overseas.

The benefits from selling higher margin honeys such as manuka as well as the integration of Chandler Honey (honey supply) and KirksBees Honey (manuka beekeepers) is underpinning the outlook, brokers maintain. Opportunities abound, brokers believe, in the export potential to Asia, with Capilano selling more of its product through Asian websites direct to consumers.

Capilano's Allowrie brand has taken significant market share from private label products in store, given it was not daunted by supply issues this season as well as being supported by the Chandler acquisition and Capilano's ability to import honey. The company has a strategic alliance with Argentina's largest honey producer, HoneyMax, and has rigorous import supply testing in place.

Seasonal variations in honey supply underscore the need to import honey to service both domestic and overseas customers. The company's Allowrie brand usually blends imported with domestic honey. Allowrie is also priced at a lower point than other branded honeys. Honey is a high-value category for retailers, which make more money from Allowrie than private labels. Hence, the rising honey price is a large spur to earnings growth.

The one miss for Morgans in the numbers was weak cash flow, as the company re-built stock, although this suggests a return to more normal seasons after low volumes in recent years. Morgans believes the stock is attractively priced for its growth profile and has an Add rating with a target of $22.80.

Morgans expects FY16 underlying profit to rise 53%, supported by improved seasonal conditions, rising exports and further market share wins, as well as the benefits of higher margin product. Upside could come from further acquisitions, the broker maintains, and from corporatising manuka beekeeping.

Canaccord Genuity also lauds the accretive potential in manuka honey. Even outside of the specialities, the outlook is strong for Capilano, with the honey season likely to be up 15-20% amid buoyant export demand. The broker upgrades to a Buy rating and a target of $21.54, following the recent pull-back in the share price.

Canaccord Genuity expects Capilano will retain its domestic market dominance as well as feed export demand. Moreover, honey consumption lifts in the lead-up to and throughout the northern winter, which should ensure a seasonally stronger second half. Key catalysts for the stock, in the broker's view, are confirmation of a strong honey season and corporate activity, both in terms of acquisitions or Capilano becoming a target.

Canaccord Genuity approves of the vertical integration strategy with manuka honey, which it considers could be highly accretive and deliver further growth in FY17 and beyond, although this is not factored into estimates.

The company does not provide formal guidance but did note its acquisition of KirksBees was progressing well. Capilano cited strong interest in its natural wholesome products, also expecting a new product range will ensure it prospers.

Revenue of $67.1m was up 16% on the prior corresponding half and market share increased to above 76% from 74%. Exports remain a large driver of the results, up 35%, with exports to Asia up 53%. As per usual practice the board did not declare an interim dividend.

Capex rose to $1.96m from $1.74m, stemming from the re-commissioning of the Maryborough factory in Victoria, which has increased the company’s capacity and supply of glass jars and non-honey products. The company also invested in KirksBees to bring it in line with corporatised farming practices. The company spent $6m acquiring KirksBees.
 

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article 3 months old

Momentum Abandoning Bellamy’s

By Michael Gable 

Bellamys' ((BAL)) has had a great run as everyone knows, but the momentum is coming out of the uptrend for now. You will notice a very negative candle on 30 December where BAL got sold off very sharply. It managed to recover a bit the last few weeks but once it got near the mid point of that candle, it got sold off again yesterday very sharply and on strong volume.

This is telling us that BAL is likely to head further south for now, possibly towards support near $11 and then we can reassess. If the current uptrend is over for now, then levels closer to $9 can be achieved.

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.