The agricultural FMCG sector encompasses a group of ~35 stocks covering a diverse set of commodities. Earnings in the sector are highly volatile and subject to short term changes in weather patterns and commodity values which are often dependent on global trends.
For this reason we tend to focus on stocks or sectors where we see either:
- A structural uplift in ROIC through investment or strategy.
- A favourable supply-demand backdrop emerging to support an elevated period of ROIC.
- Or a long-term through the cycle growth thematic in the underlying asset base.
At this point in the cycle we are seeing value in three key names being Synlait Milk Ltd, the a2 Milk Company and NuFarm.
Synlait Milk Ltd (SM1)
SM1 is NZ’s fourth largest milk processor (accounting for ~4% of NZ’s milk intake) and a B2B supplier of dairy ingredients (SMP, WMP & AMF), infant formula (IMF) products and Lactoferrin.
Synlait Milk counts global FMCG companies among its client base, including the a2Milk Co (A2M) for which Synlait is the exclusive supplier of infant formula in China, Australia and NZ.
We do not see the current share price as reflecting the favourable margin gain that SM1 generates as it transitions its sales mix from dairy ingredients towards higher margin canned infant formula (IMF) and adult nutrition products. Importantly we expect this transition to accelerate in FY18-20e with completion of the new Auckland canning line and as investments in flexible packaging capacity for IMF and adult nutrition products are progressed.
Growth in A2M branded products is a key driver of near term growth, however, we also expect the customer base to diversify in FY19-20e improving the risk profile of SM1.
In addition SM1 continues to trade a material discount to its global dairy ingredient and IMF peer group.
The a2 Milk Company (A2M)
The a2 Milk Company (A2M) is in the business of producing, marketing and selling branded dairy and infant milk formula (IMF) products in Australia, New Zealand, China, US and UK. A2M branded milk contains only A2 Protein rather than both A1 and A2 proteins which are found in Regular Cows’ Milk.
Over the next twelve months we see a number of key growth catalysts for A2M being:
- An acceleration in China IMF sales as brand rationalisation post Jan’18 favours brands which have achieved CFDA registration.
- An acceleration in demand for the existing range of a2 branded adult nutrition powders (WMP/SMP sachet packages) and the potential for a launch of more advanced formulations in this category.
- An acceleration in the distribution reach of fresh dairy products in the US reducing losses in this market in FY19-20e.
- And the potential for higher margin products to be added to the existing UK portfolio (infant and adult nutrition).
In our view A2M is at the commencement of its growth trajectory utilising a strong IP base to expand its product portfolio globally.
NUF is a leading supplier of off-patent agricultural chemicals (~77% of the contestable market), seeds and seed treatments globally, with a marketing presence in over 30 countries and sales in over 100 countries.
Having recently executed two material acquisitions in Europe the focus of investors will likely begin to become the underlying strategy of NUF to deliver earnings growth through to FY21e, a strategy predicated on:
- The integration of the Century and FMC portfolios (combined $110-115m EBITDA by FY19e).
- Delivery of ~$15m in cost savings from back office consolidation in Europe.
- Investments in working capital systems to facilitate a further reduction in working capital.
- Delivery on the launch of omega 3 canola, which is expected to see commercial sales commence in FY19e (with a positive EBIT contribution by FY21e).
Following the recent share price correction NUF is trading at ~8.0x ProForma FY18e EBITDA, a 15-20% discount to global agricultural input producers and at 10-15% discount to the ANZ average for input producers and suppliers.
Thank you ,good info