With the three-way takeover battle for Warrnambool Cheese Butter moving toward an end-game, investors are looking at other agribusiness stocks on the ASX.
One low-profile but dynamic rural business is the Mildura-based Tandou Limited (TAN), a water trading, irrigated cropping (cereal and cotton) and pastoral (sheep meat) business. The stock offers investors exposure to both water assets and trading, and a broad portfolio of soft commodities in Australia.
Tandou farms 79,000 hectares of land in south-western New South Wales, running cereal and cotton crops on 24,000 hectares (about 13,380 hectares of which is irrigated) and Dorper sheep (a breed of meat sheep) on 55,000 hectares (including leasehold land, the pastoral operations use about 185,000 hectares.) The company is one of Australia’s largest cotton growers, with an integrated operation: there is an on-site cotton gin, which enables tight quality control, to maximise production, as well as minimising freight costs.
Tandou supplies San Remo’s pasta plant in Adelaide with durum wheat. The company also grows malting barley, used in brewing, and will “opportunistically” plant sorghum, sunflowers and corn.
The company also runs a broad portfolio of water entitlements, which come with certain properties, and which farmers buy and sell. The portfolio is spread across the Lower Darling, Murray, Murrumbidgee and Goulburn systems. Tandou buys water entitlements mostly as an investment, for long-term capital growth: it will sell water allocations when demand – and thus the price – is high, but when demand and prices are low, it will use more water in crop production.
Ultimately this should be a win-win for investors, offering a secure long-term return while maximising shorter-term opportunities. Investors could make a case for using Tandou as the ideal ASX-listed vehicle through which to invest in water.
In FY13 the water trading business contributed more than 63% of group earnings. The water operation boosted its profit by 14% to $7.3 million. Tandou sold about 16,000 megalitres of water entitlements for $17.3 million.
This helped Tandou lift net profit 16% in FY13, to $6.02 million, on the back of revenue that jumped by 34% to $65.72 million, and reported a Earnings per share (EPS) rose by 17%, to 4.2 cents. The company paid an unfranked interim dividend of 1 cent a share – all paid in the first-half – its first payout since 2003.
The net tangible asset (NTA) backing of the shares at 30 June 2013 stood at 56 cents, up from 52 cents in FY12. But if all water rights – which are not tangible assets – are included, the directors’ valuation of net asset value (NAV) is 70 cents a share, up from 67 cents in FY12. Tandou trades at 48.5 cents, giving it a market capitalisation of $69 million.
Tandou draws a 50-gigalitre allocation from Menindee Lake, which can hold 1800GL – the equivalent of more than three Sydney Harbours. As at June 30, 2013, the company held water entitlements of 33,859 megalitres. The secure water availability has enabled Tandou to increase plantings substantially in its 2014 cropping program, as has the recent acquisition of irrigation property “Glenmea” (near Hay): as a result Tandou has expanded its cotton acreage by nearly a quarter to 8,800 hectares. This follows the winter cereal planting, which increased 20% in area, to 5000 hectares.
In FY13, the cotton harvest came in a record 7,105 hectares – which gave approximately 72,000 bales – while the total winter cereal harvest was 29,500 tonnes.
The company has forward-sold about 60% of the 2014 cotton crop at an average price of $465 a bale, up from the 2013 crop price of $455 a bale.
Despite dry conditions during the 2012/13 summer, Tandou maintained its stock numbers at full carrying levels – comprising 18,000 Dorper breeding ewes – for the 12 month period. The Dorper sheep – a South African breed – was introduced to Australia in 1996. The breed is considered very drought-tolerant, and a good breeder. The pastoral operation produces organic lambs, which attract a premium price because of Tandou’s farming practices.
Tandou lamb is completely free of pesticides, herbicides and all chemicals, while the company uses conservative land management practices, centred around high-density time-controlled grazing followed by adequate rest periods for all paddocks, to allow for plant recovery. This system allows the company to maximise the productivity of its free-grazing organic lambs while protecting the land.
Being able to certify its lamb as organic gives Tandou a competitive advantage: it is able to attract a price premium for the lamb in both the domestic and United States markets. The company says the organic market is increasing in Australia and is well-established in the United States and Europe: and as the growing middle-class of new consumers in Asia moves up the protein ladder as it moves up the wealth ladder, Tandou believes there is a very strong future for its lamb.
(Although, the company has to manage carefully the perception of consumers, given that its certified organic lamb farm is located near its genetically-modified cotton acreage. However, it can make the case that using its GM cotton is actually more responsible: it is modified to resist cotton bollworm, and thus requires less pesticide use than other strains of cotton.)
Tandou’s diversified income streams of high-quality cotton and cereal crops, lamb and water trading – supported by one of the largest, most diverse, actively managed water portfolios in the Murray-Darling Basin – give investors exposure to both water assets and “soft” commodities. You can never remove risk from the process of farming but Tandou has shown in recent years that it is a very well-managed company, which has grabbed a significant niche market through its highly sophisticated water trading operation – it has excellent knowledge of what is still a poorly understood market. Australia is one of the only jurisdictions in the world to invest in water entitlements, but it is an immature and growing market.
Tandou has given no guidance for the FY14 year, but the stock has been a good performer in recent years, generating a total return of 32% a year over the last five years, and 12.9% a year over the last three years. For the last 12 months, with a contribution from the FY13 dividend, the return is running at 20.7%. The 2% trailing yield is nothing to write home about, as yet, but for those who want a bit of Australian farming in their portfolio, Tandou is a high-quality exposure.
