Favourable Production and Pricing Statistics to Support Agriculture & Consumer Staple Sector

1. Sector Landscape

The gross value of agricultural production is estimated to be $83.1 billion for FY22. The unprecedented result stems from the record high crop production, combined with the highest prices in real terms. Australia has harvested the most valuable winter crop ever, despite widespread downgrades in grain quality witnessed across regions of NSW following an exceptionally wet period.

Key High-Level Contributors to the Sector

Improved Monthly Household Spending: For April 2022, household spending advanced by 7.6% PcP at the current price, calendar adjusted. Primary attributes were transport (+12.4%), hotels, cafes & restaurants (+14.3%), and furnishing & household equipment (+14.9%). Queensland and South Australia were the states witnessing the highest household spending throughout the year.

Improved Business Turnover for Accommodation and Food Services: The business turnover for accommodation and food services has continued to increase in April 2022 by 7.6% as containment measures eased. The significant recovery can substantiate favourable prospects for the agricultural and staple demand.

Improved Retail Trade: Retail trade in April 2022 rose by 0.9% MoM and 9.6% PcP. Food retailing advanced by 1.9% or $243.1 million in April 2022. Total online retailing sales stood at $3,676.2 million in April 2022. Seasonally adjusted online sales slipped by 1.3%, or $48.7 million. However, total online retailing turnover stood elevated, up by 24.4% on a PcP basis.

Agriculture Prospects

Agricultural Exports Forecast to Clock Record Levels: The value of agricultural exports is projected to clock at $64.9 billion in FY23. Despite the ongoing challenges of global supply chains over the 12 months to March 2022, Australia shipped an average of 3 million tonnes of barley, wheat, and canola per month.

Gross Value of Agricultural Production: The gross value of agricultural production is estimated to be clocked at $80.4 billion in FY23, down by 3% from the record level of $83.1 billion in FY22. The gross value of crop production is estimated to clock $45 billion in FY23, the second-highest recorded, following the high of $48 billion in FY22.

Index Performance

The ASX 200 Consumer Staple (GIC) Index has generated a 5-year return of ~+31.77%, compared to ~+14.15% return by the ASX 200 Index. Increased household spending, favourable global demand, increasing government spend, spurt in international prices, and decent economic factors are some of the contributing factors.

The ASX 200 Consumer Staples (GIC) Index outperformed ASX 200 Index in the past 5 years by whooping ~17.62%.

Source: REFINITIV as of 16^th June 2022

Key Risks and Challenges

Crop production is expected to fall from the record level of FY22, despite an excellent start and a favourable outlook. World fertiliser prices stand at the highest level since 2008, leading to reduced use of farm types. By the end of May 2022, 17% of globally traded calories were subject to trade restrictions. The limited availability of farm labour has challenged the agriculture industry.

Outlook

Growing Gross Domestic Product (GDP): The GDP rose by 0.8% in March 2022 quarter, followed by a rise of 3.6% in December 2021 quarter. The terms of trade increased by 5.9%, with exports rising by 9.6%.

Improved Household Spending: In March 2022 quarter, the household spending increased by 1.5%. The opening of borders contributed to improved recreation and culture (+4.8%) and hotels, cafes & restaurants (+5.3%).

Weakening Australian Dollar Improving Competitiveness: The Australian dollar is assumed to depreciate further to the average at US71 cents in FY23, raising the competitiveness of Australian agricultural exports.

Favourable Crop Exports: The value of Australian crop exports is estimated to increase to nearly $40 billion in FY23, driven by high world prices and substantial exportable surplus.

Horticulture Producers to Capitalise on Prices: The export-focused horticulture producers will likely take advantage of higher global prices by raising export volumes to South-East Asia in FY23.

II. Investment theme and stocks under discussion (TWE, BGA, CGC)

After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/EBITDA’ multiple method.

1. ASX: TWE (Treasury Wine Estates Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$7.88 billion)

TWE is harvesting and sourcing grapes, producing wine, selling, and distributing wine.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 20.76% on 16 June 2022. However, the stock might trade at a slight discount compared to its peers’ median EV/EBITDA (NTM trading multiple), given high competition and maintenance of prudent inventory management. For valuation, peers such as Australian Vintage Ltd (ASX: AVG), Lark Distilling Co Ltd (ASX: LRK), Good Drinks Australia Ltd (ASX: GDA), and others are considered. Given the decent fundamentals, change in strategic views, high cash conversion rate, current trading levels and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $10.730, down by ~1.739% as of 16 June 2022. In addition, the stock has delivered an annualised dividend yield of 2.56%. On the technical front, the immediate support levels are AUD 9.350 & AUD 8.400, and the immediate resistance levels are AUD 12.080 & AUD 13.120.

TWE Daily Technical Chart (Source: REFINITIV)

2. ASX: BGA (Bega Cheese Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.36 billion)

BGA is a diversified branded foods business company with an integrated value chain from farm to consumer.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 18.13% on 16 June 2022. However, the stock might trade at a slight discount compared to its peers’ average EV/EBITDA (NTM trading multiple), given high competition in milk and milk products. For valuation, peers such as Tassal Group Ltd (ASX: TGR), Murray Cod Australia Ltd (ASX: MCA), Inghams Group Ltd (ASX: ING), and others are considered. Given the surged top-line, expansion via Lion Dairy and Drinks acquisition, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $4.330, down by ~3.777% on 16 June 2022. In addition, the stock has delivered an annualised dividend yield of 2.33%. On the technical front, the immediate support levels are AUD 4.100 & AUD 3.550, and the immediate resistance levels are AUD 5.040 & AUD 5.400.

BGA Daily Technical Chart (Source: REFINITIV)

3. ASX: CGC (Costa Group Holdings Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.37 billion)

CGC is Australia's leading grower, packer, and marketer of fresh fruit & vegetables. It operates in five core categories: berries, mushrooms, glasshouse tomatoes, citrus, and avocados.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 10.72% on 16 June 2022. However, the stock might trade at a slight discount compared to its peers’ average EV/EBITDA (NTM trading multiple), considering potential supply chain constraints and labour supply shortage. For valuation, peers such as Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Lynch Group Holdings Ltd (ASX: LGL), and others are considered. Given the increased shipments, diversification into the global energy portfolio, upscaling fundamentals, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $2.990, up by ~0.673% on 16 June 2022. In addition, the stock has delivered an annualised dividend yield of 3.03%. On the technical front, the immediate support levels are AUD 2.660 & AUD 2.380, and immediate resistance levels are AUD 3.510 & AUD 4.060.

CGC Daily Technical Chart (Source: REFINITIV)

Comparative Price Chart:

Source: REFINITIV as of 16th June 2022  

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.  

Note: All the recommendations and the calculations are based on the closing price of 16 June 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned per the valuation has been achieved and is subject to the abovementioned factors.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.