* This is a reprint from Barron's USA, and is republished with permission. It is run as a report - these are not stock recommendations.
They call Israel the land of milk and honey, but you could call Australia the land of milk, honey, nuts, meat, fish and pretty much anything else that finds its way to the dinner table. Food’s also the new hot commodity in the Land Down Under’s stock market, where oil and mining shares have been chewed up and spat amid slowing Chinese demand.
So investors should tuck into Australia’s food and drink stocks, which have dished up some of the beefiest returns of late. Organic baby formula maker Bellamy’s Australia (BAL.AU) is up 550 per cent in the last year on the back of soaring China demand. But at a price-to-earnings ratio of 130, its valuation looks richer than a pint of full-fat cream. Same goes for wine producer Treasury Wine Estates (TWE.AU): The shares are up 85 per cent in a year, but its earnings multiple of 70 is enough to leave you with a hangover.
But Barron’s Asia has identified three stocks that are reasonably valued plays on Australia’s transition from mining-to-dining and also offer respectable yields.
Shares in almond grower Select Harvests (SHV.AU) have been crushed in 2016, down nearly 40 per cent since New Year. The stock cracked on new concerns of oversupply in the almond market after a much bigger than expected crop last year from California, by the far the biggest producer of the popular nut. Almond prices have fallen from a peak of $5 per pound over summer to about $3 now. The market’s also been rattled by the strong US dollar, which makes nuts pricier for big importers in India and China.
Select Harvests’ share price crunch has certainly made it look cheap. It now trades at about six times last 12 months’ earnings, versus its five-year average of more than 20 times. The company will probably suffer short-term profit weakness given the slide in almond prices, and earnings per share could slump about 20 per cent in fiscal 2016. The long-term scenario looks more upbeat: UBS analyst Jordan Rogers thinks earnings could rebound strongly by the end of 2017. He thinks almond prices could see a rebound if and when the end of the current El Nino weather system brings drier conditions to California. Almonds are among the most water intensive crops.
Global consumption of almonds keeps growing, too. Widely seen as one of the healthiest nuts, people are also less likely to be allergic to them than peanuts or cashews. Rogers has got a price target of $AUD10.20 a share on the shares - almost twice their current value. In the meantime, the stock is yielding nearly 10 per cent based on its current price.
This year hasn’t gone swimmingly for Tasmanian salmon farmer Tassal Group (TGR.AU). The stock has sunk about 20 per cent since late January, but there’s nothing fishy about the shares. Australia’s salmon industry has come through a recent regulatory probe unscathed, while consumption of fish and seafood among the locals keeps growing.
Still, investors were underwhelmed by a mixed showing in Tassal’s recent half-year results. Growth in earnings from salmon was flat despite a rise in export prices. JP Morgan analyst Armina Soemino says this may be because Australia’s salmon market is slightly oversupplied at the moment, though things should even out. Earnings were also hurt by a rise in fish-feed costs.
Tassal can fatten up its bottom line elsewhere, though. The company is streamlining logistics and its supply chain, which should make Tassal a lower cost operation. Last year’s acquisition of De Costi gives the firm a foothold in squid, prawns and other sea foods. Overall, earnings per share could rise about 20 per cent in fiscal 2016.
Tassal shares look reasonable value at 13 times trailing earnings, while the stock also yields a decent 4.5 per cent dividend based on its recent share price. This compares well with Huon Aquaculture Group (HUO.AU), which trades at 17 times earnings and doesn’t pay a dividend. The country’s salmon fishing industry also enjoys something of a charmed life: The waters off Tasmania are the only place cool enough to cultivate the pink fish, which means limited local competition. JP Morgan’s Soemino has a price target on Tassal of AUD4.74, or about 20 per cent upside.
Investors have been sweet on Capilano Honey (CZZ.AU) since last summer, with the stock up almost 50 per cent since July.
Morgans analyst Belinda Moore has a Buy rating on Capilano with a price target of $AUD22.8, or more than 20 per cent upside. She says rising awareness of the health benefits of honey both by Australians and overseas is creating a buzz around the shares. That people are consuming more honey is reflected in a wholesale price that’s consistently risen over the years: The sweet, golden goo now sells for about $USD6.9 a pound - double what it was a decade ago.
Moore thinks Capilano’s stock price could fly higher after the acquisition of bee keeping business Kirks Bees Honey. That company makes manuka honey, which is said to have medicinal qualities. Manuka honey is enjoying explosive demand from China, where it’s consumed as a health food. Like other Western nutritional imports, demand also been buttressed by distrust of Chinese products after high-profile health scares. China and Hong Kong are now the second-biggest global markets for manuka, with supply so tight the industry is now grappling with honey smugglers and knock-off merchants.
Exports of the “liquid gold” should also enjoy the fruits of a freshly-inked free trade deal between Australia and China, which will eventually cut tariffs. In its most recent half-yearly report, Capilano said exports to Asia were up more than 50 per cent year-on-year.
Morgans’ forecasts show Capilano’s earnings per share minus one-offs could grow by over 50 per cent to AUD1.40 for its fiscal 2016. The company’s dividend yield could reach a not-too-shabby 3 per cent, while returns on shareholder equity should remain high and net gearing manageable over the next couple of years. One issue to watch is weaker cash flow: While Capilano is booking more profits, payments received might be lower this year. At about 15 times 2016 earnings Capilano isn’t a bargain, but the stock is more of a growth than value play. Now could be a good time to enter as Capilano’s taken a breather since New Year, down 10 per cent.
New Zealand’s Comvita (CVT.NZ) also looks a compelling health food play. The stock is up 150 per cent in the past year as it’s enjoyed a similar China boom. The shares pay a slightly smaller dividend than Capilano and the company is more diversified, with products like fish oils and herbal extracts.
* This report originally appeared in Barron’s, and is republished with permission.