Aust Ag Co's political risk

The looming political fight over Graincorp will have serious ramifications for Australian Agricultural Co.

For all the hype of a looming soft commodities boom, our place as one of the world's largest rural product exporters and our potential as the food bowl of Asia, Australia has a poor record when it comes to agribusiness.

Rationalisation and foreign buyouts have swept up most of the nation's grain and sugar businesses in the past five years and the few remaining stockmarket listed entities are struggling, after years of substandard returns to investors.

That situation could be exacerbated by the looming battle within the Coalition over the proposed corp takeover of GrainCorp (GNC) (see 10 stocks in the takeover spotlight) and will particularly impact Australia's biggest landholder Australian Agricultural Co (AAC).

A perennial underperformer, AACo this week announced a $300 million capital raising to pay down debt and fund construction of a Darwin abattoir as part of a strategy that it hopes will align cattle prices and hence revenue to global rather than domestic factors.

Buffeted by years of drought, flood and gyrating cattle prices, AACo has racked up $90 million in losses during the past five years on revenues of $1.4 billion with equity raisings diluting future returns.

Should Australia's biggest landholder and cattle producer succeed in its bid to turn around its fortunes, it would be highly likely to attract the interest of a foreign predator willing to accept the wild earnings gyrations inherent with beef production.

But the critical factor, from an investor perspective, will be the incoming Coalition government's attitude towards foreign investment in the agricultural sector and particularly the ownership of land.

High profile National Party members have signaled their intention to obstruct the US group Archer Daniels Midland's agreed takeover of Graincorp, the biggest grain handler on the eastern Australian seaboard. AWB and ABB already have been swallowed by North American interests,

Given AACo controls a property portfolio of 6.5 million hectares, an even harder line could be expected by National Party members against a foreign bid for the company, particularly if the buyer was controlled by an Asian government owned corporation.

Those concerns and the removal of a takeover premium are likely to keep a lid on AACo's share price for the medium term to longer term.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles