Right Time For The Rising Ridley?
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Ridley is now a very well-diversified business, particularly to the high-growth businesses of aquaculture, dairy, poultry and rendering, and has an attractive blend of local and global markets.
Stockfeed business Ridley Corporation (RIC) is a great example of how a company can perform poorly, yet still be quite highly thought of on the market.
Ridley is Australia’s largest commercial provider of “high-performance animal nutrition solutions,” which is animal feed, supplements and additives, aimed at boosting protein output by better nutrition. The major business is Ridley AgriProducts, which makes stock feed for the beef, dairy, poultry, pig, sheep, and aquaculture industries, as well as for laboratory animals, and pets (cats, pigs and horses.)
The main brands are Barastoc, Cobber Dog Foods and Rumevite. Ridley Aqua-Feed serves the growing aquaculture industry, milling feed for farmed fish species including barramundi, mulloway, prawns, salmon, silver perch, trout and yellowtail kingfish.
Until recently, Ridley owned the Cheetham Salt business, which supplies salt products to the industrial, food, stockfeed, pharmaceutical and pool sectors. Ridley sold Cheetham Salt in February 2013, to Hong Kong-based CK Life Sciences (a member of the Cheung Kong Group) for $150 million.
In preference to salt, Ridley wanted to get into the rendering business, which takes otherwise surplus raw materials from the food processing industry and turns them into meals, tallows and oils. In March 2011 Ridley started the process, buying Camilleri Stockfeeds for an estimated $30 million. In 2012, the company spent $77 million buying Melbourne-based rendering business BPL, which processes poultry and red meat offal into high-protein additives for animal feed, and added the small Bartlett Grains tuna meal importation business for $1.7 million.
In 2013, the rendering business was renamed CSF Proteins. It supplies animal protein products to domestic and international markets, turning waste products from the food industry into high-performance feed ingredients and renewable fuels. CSF’s animal meals - which include meat and bone meal, poultry and feather meal, blood meal, fish meal and animal fats – are an important and valuable source of protein, and have opened up significant export opportunities for Ridley. (An outbreak of avian influenza in October 2013 at a New South Wales poultry producer has temporarily closed some export markets, namely China and Indonesia.)
Ridley is one of the few listed agri-business exposures on the Australian market of any decent size - it is capitalised at $258 million - which institutions like, but it has been a serial under-performer. Over the last five years, the stock’s total return (capital gains plus dividends) is just 4.9% a year. Over three years, Ridley has actually lost investors money: it is down 7.8% a year. At 84 cents, the stock trades virtually where it did five years ago.
Over the past 12 months, it’s doing better than it has for a while, but its return is still only pedestrian, at 7.5%. 2013 was not a great year for Ridley: the stock slumped from $1.06 in February to 69.7 cents in June, before beginning an upward trend that has taken it to 84 cents.
In FY13, revenue rose by 13% to $716.3 million, but the company reported a net loss of $21.7 million after it wrote $34 million off its salt assets and associated goodwill. EBIT (earnings before interest and tax) from continuing operations rose by $700,000 to $23.9 million.
Then, for the half-year ended December 2013, revenue rose 28% to $442.6 million, while net profit came in at $9.9 million, up from a loss of $12.7 million, after the 2012 result was hit by $24.9 million of one-off impairments and transaction costs, also resulting from the sale of Cheetham Salt.
The company paid an interim dividend of 1.5 cents a share, 50% franked, out of retained profits. The company is not paying much tax, so can’t frank its dividends fully. Full franking is expected to resume in FY15.
Ridley is trying to change the main part of the business, stockfeed, from being a “swing” producer to being a crucial part of the supply chain into the beef, dairy, poultry, pig, sheep, and aquaculture industries – particularly the intensive aquaculture, poultry and pig industries, where the quality of the feed determines the growth rate.
The smaller part of the business, rendering, gives it an export earnings stream (it also sells the products to Ridley AgriProducts) and exposure to soft-commodity demand in Asia. It is a good, sustainable high-value business going forward, and Ridley now has a strong position in a fragmented Australian industry, with high barriers to entry, in a business that can demonstrate that it recovers and adds significant value to waste products.
Ridley is now a very well-diversified business, particularly to the high-growth businesses of aquaculture, dairy, poultry and rendering, and has an attractive blend of local and global markets. Aquaculture is Ridley’s fastest-growing sector, at home and overseas: the company says Asia is home to about 90% of global aquaculture production: farmed fish is expected to exceed the wild catch by 2018. Australia’s small aquaculture industry has grown at 11% a year for the last 20 years. Also, Ridley has the exclusive licence to develop an aquaculture feed based on algae, invented by Australia’s CSIRO, which could become another high value-added product.
The company says its main opportunities are in investing in the right infrastructure in the right places to satisfy the growing demand for feed; securing or owning the key raw materials streams required for increased feed production; and exploring novel raw materials and finished feed types to boost animal yield and create competitive advantage (both for Ridley and the farmer.)
The company also has a substantial land bank from its salt-making days, including major coastal sites at Lara and Moolap in Victoria, and Dry Creek in Adelaide, which offer significant residential development potential.
But another explanation for why institutional investors like the stock is that Ridley is a perennial takeover target nomination. GrainCorp bid unsuccessfully for Ridley in 2008 and has long been regarded as being likely to make another tilt, given that Ridley’s feed-milling and rendering operations would fit well with GrainCorp’s silos and feedmills.
In that context, Ridley has strong strategic value, in an east-coast market where competition is heating up – as evidenced by Qube Holding’s new Quattro Grain joint venture with Hong-Kong based agricultural group Noble. Ridley is the second-largest buyer of grain on the eastern seaboard, buying 1.2 million tonnes a year: having that stable level of demand would be a good asset for GrainCorp - indeed, for other grain traders like Cargill or Emerald or Louis Dreyfus. Any bid for Ridley would be complicated given AGR Partners’ holding - but not impossible.
In the meantime, the analysts that follow Ridley reckon the stock should be able to attain 95 cents, which at least gives a buyer at 84 cents some hope of an 11.6% gain. The yield to augment that is not going to be spectacular, but at least Ridley has resumed paying dividends. The estimated FY14 yield is 4.8%, probably 50% franked. Given that Ridley has retraced its price steps to five years ago, buying now could capture the benefits of a changed - and more appealing business - without the pain that other investors have suffered over that time.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au