London-listed exposure to the agricultural sector

John Mulligan



16.09.10 10:51


The previous articles in this series highlighting investment opportunities in the agricultural and soft commodity sector have covered the general background to global supply and demand and more specifically the role of exchange traded funds.



I thought that I would turn now to some of the specific direct equity investment options that exist in this sector.


As domestic agriculture now plays a relatively small role in the UK economy the investment options in direct agricultural production have, for many years, focused on food production companies on the one hand and traditional plantation crop producers on the other.


Given the historical ties between Britain and its colonies the importance of tropical plantation agriculture is perfectly understandable. This general approach contrasts strongly with the US scene where agriculture plays a much larger role in the whole economy.


For British investors direct equity investment in soft commodities and farming, using the medium of London-listed companies, really comes down to the major food production groups such as Unilever (ULVR), Tate & Lyle (TATE), the dairying companies and the smaller producers such as Cranswick (CWK) and Glanbia (GLB) on the one hand and the overseas plantation companies on the other.


Apart from these there are a few listed companies that are directly or indirectly involved in producing a range of agricultural commodities.


In this article I shall touch briefly on some of the major food production companies listed on the LSE main market and follow in the next one with a focus on plantation companies and other overseas producers.

Analysis of the longer-term sales and profits for most agricultural sector producers throws up a generally lacklustre record with occasional bursts of prosperity achieved when positive environmental factors happen to coincide with spikes in commodity prices.


Of course, these occurrences are relatively rare as good weather conditions usually lead to production gluts and lower prices.


However, the increasing incidence of extreme climatic conditions in specific regions can, from time to time, deliver attractive short-term financial benefits to producers operating in those parts of the globe unaffected by droughts, floods and other climatic disasters.

The large London-listed global food producers


Unilever


Code: ULVR.L
Recent Price: 1743p
Div yield: 3.6% A Actual 2009 PER: 14.3
Estimated PER: 13


As global food producers go, Unilever is up there with the big ones with a market cap of £22.5 billion, annual sales of £35 billion and 2009 pre-tax profits of £4.3 billion. Their food products include well known brands such as Lipton (tea), Hellmans (mayonnaise), Knorr (soups) and Flora (margarine).


Although direct crop production is a relatively small component of the group's overall business the Unilever group is nevertheless closely linked to farming practices through its involvement with tea producers and oil palm plantations and the group is also a founder member of the Roundtable on Sustainable Palm Oil.


Investment in Unilever is generally considered to be a sound long-term constituent of balanced equity portfolios as its concentration on the processing, marketing and distribution aspects of the food industry provides some protection against the volatility and lower margins inherent in the production end of the food chain.


However, in no way can it be considered other than as a staid large global producer of foodstuffs and toiletries that is never likely to outperform smaller focused businesses with strong niche market positions.



Tate & Lyle


Code: TATE.L
Recent Price: 440p
Div Yield: 5.2%
Actual PER: 7.1
Estimated PER: 10.9


Traditionally a large scale producer of sugar and sugar by-products this world famous group is now a developer and processor of corn and sugar products for a wide range of wholesale and retail customers.


At the current price level the shares offer a relatively safe dividend yield even though the analysts covering the shares are forecasting little growth in earnings and dividends over the next couple of years.


Smaller food producers


Cranswick


Code: CWK.L
Recent Price: 850p
Div Yield: 2.7%
Actual PER: 12.3
Estimated PER: 11.6




Cranswick is included in this list because it started life in 1988 as a famer-owned pig production company and, until 2007, owned most of the farms on which the pigs used for their pork and sausage products were raised.


Cranswick is now a highly successful food production company with processing factories close to their suppliers' pig farms in Yorkshire and Norfolk. The sale of the company's farm units some three years ago demonstrates the higher margins achievable in the processing and manufacture of their final products. These include pork, sausages and general charcuterie as well as higher value sandwiches and convenience foods.


Although Cranswick is no longer a direct farm production company it remains an interesting investment as it has an enviable record of steady uninterrupted growth in sales, profits, earnings and dividends over more than five years. It is not particularly cheap in comparison with other food manufacturers but would make a solid component of any long-term equity portfolio.


The fact that Cranswick, as a business started by farmers, decided to dispose of the farming side of its activities three years ago demonstrates the prevalent corporate view that investment in agricultural production usually delivers poor returns.




The relatively low return on total capital invested in the actual process of farm production, including the value of the land, in densely populated countries like the UK is due in part to the very high value attaching to British farmland. This results mainly from non-agricultural demand for land for building and leisure uses.


For this reason, companies like Cranswick have moved capital away from land ownership into the higher yielding processing or retailing side of operations.

Glanbia


Code: GLB.L
Recent Price: EUR3.60
Div Yield: 2%
Actual PER: 9.2
Estimated PER: 8.9




Glanbia is an Irish domiciled cheese processor specialising in Mozzarella cheeses and has operating plants in the UK, the USA and Nigeria as well as in Northern Ireland.


Although closely associated with the dairy industry their connection to producers is effectively that of product purchasers rather than producers.



The UK dairy companies


Robert Wiseman Dairies


Code: RWD.L
Recent Price: 485p
Div Yield: 3.7%
Actual PER: 9.7
Estimated PER:11.1


Glasgow-based Robert Wiseman has a strong reputation in the declining dairy sector for efficient management and marketing and this has shown through in the sales and profits record over the past five years. The shares, currently 485p, are priced at 9.7 times 2010 actual earnings of 50p per share and yield a well covered 3.7%.


Although the overall opportunities for growth are clearly limited in the UK dairy industry as a whole, Robert Wiseman Dairies has developed a strong record of profits and dividends with sales expanding by more than 80% over the past five years while pre-tax profits grew by just under 100%, earnings were up by 78% and dividends more than kept pace with a five-year increase exceeding 120%.


The Wiseman brothers, who own approximately one third of the listed equity in the group, seem capable of continuing their excellent track record for some time to come.






Dairy Crest


Code: DCG.L
Recent Price: 374p
Div Yield: 5.0%
Actual PER: 9.4
Estimated PER:8.1




The past five years' trading record of Dairy Crest, a group that grew after the dismantling of the Milk Marketing Board (MMB), is an interesting illustration of the difference in business performance that can occur when one compares an established group operated entity with one run by clear sighted entrepreneurs.


Dairy Crest, as an example of the former, has managed to raise sales by no more than 29% over the past five years with a paltry gain of only 11% in pre-tax profits over the period while earnings and dividends per share actually fell by 2% and 5% respectively.


On the basis of the past five year record the outlook for shareholders in Robert Wiseman would appear considerably brighter than for those in the larger Dairy Crest even though analysts are estimating stronger earnings projections in 2011 for the latter company.


I plan the next article in this series should cover the overseas plantation sector.