Rural supplies and agency generate more than half of gross profit, but RHL has worked hard to add diversification, with water services, and broking financial services, grain marketing and the live export business, which is only in its infancy.
Like the farmers it works with, diversified agribusiness Ruralco Holdings (RHL) doesn’t do a lot of bragging. In fact, it doesn’t say a great deal at all.
The company has only released a handful of announcements since reporting its interim result in May. That result was a ripper, with Ruralco beating market expectations and its own guidance, reporting a net profit of $10.5 million for the half-year ended 31 March 2015, more than double the interim profit in 2014 and, in fact, a profit equivalent to that of the full FY14 year, which was itself up 86 per cent. Revenue for the half-year rose by 36 per cent, to $742.8 million.
Ruralco has fully justified the strategy that saw the Tasmanian-based pastoral and rural services company Roberts – founded in 1865 – merge with Sydney-based independent rural merchandise agent Ruralco in 2006. Since the merger the market capitalisation of the company has increased six-fold (to $270 million), with the earnings base diversified into new sectors.
The company is broadly diversified, with six revenue streams. Rural supplies include crop protection products, fertiliser, water management systems, and other products for rural farming operations. Ruralco has more than 500 local distribution outlets. The Wool and Livestock segment provides marketing and feedlot services for sheep, dairy, and beef farmers. Grain Marketing subsidiary Agfarm markets grain and the Financial Services segment offers insurance, risk advisory services, and credit products.
Ruralco also offers property management services as well as traditional real estate agency services. The latest addition is Water Solutions, offering irrigation planning and installation services: this division came about when Ruralco bought Perth-based water management business Total Eden in February 2014. Total Eden sells, designs, builds and operates irrigation systems for the agricultural, mining and construction sectors. The company also operates a water broking business.
One of the most interesting things the company has done in the last couple of years is the establishment of a live cattle export partnership called Frontier International in October 2013, exporting premium livestock both for consumption and breeding purposes, to selected international markets, with a supply chain built on a foundation of quality assurance. Frontier International began shipments in May last year. While the initial focus has been on Indonesia, Vietnam and China, Ruralco says there is definitely potential in China on the back of the newly signed Free Trade Agreement and the associated live export protocol.
Not only does Frontier International capitalise on the growing demand for protein in South-East Asia, it strategically supports the Ruralco agency business, by providing a steady pipeline of sales for livestock agents across the network. Ruralco has committed to actively developing new markets throughout Asia.
Rural supplies and agency generate more than half of gross profit, but RHL has worked hard to add diversification, with water services, and broking financial services, grain marketing and the live export business, which is only in its infancy. The new Ruralco Seasonal Finance product was launched in the September half, offering a line of credit for livestock purchases, and this was augmented by Agfarm’s input finance product, Accelerate, which was rolled out in time for the 2015 cropping season: it enables growers to finance their harvest inputs. The company expects both products to generate future growth in financial services. Ruralco also spent the financial year consolidating and rationalising its warehouse portfolio, and back-office operations.
Ruralco rules off its full-year accounts at the end of the month. Given the strong improvement in profitability in the last two years, the market is expecting the trend to continue. Broker Morgans’ forecasts have RHL lifting earnings per share (EPS) by 36 per cent in FY15, to 27 cents, and boosting its fully franked dividend by two cents to 18 cents, a rise of 12.5 per cent.
At the current share price of $3.44, that places Ruralco on a price/earnings (P/E) ratio of 12.7 times expected FY15 earnings, and a fully franked yield of 5.2 per cent. Morgans sees RHL improving both EPS and DPS by about 11 per cent in FY16, putting it on 11.5 times forecast FY16 earnings and a fully franked yield of 5.8 per cent.
Those are arguably quite attractive numbers – made even more intriguing by Morgans’ target price of $3.90 – which implies upside of 13.4 per cent from the current price.
The share price has traded sideways since the interim report, as investors weigh up the fact that the company still has not appointed a chief executive officer since John Maher stepped down in May: former general manager of rural retail, Travis Dillon, has been acting in the role since then. (The company also recently installed its eighth chief financial officer in nine years.) On top of the leadership angle, investors probably have one eye on the weather in the key areas of northern New South Wales and western Queensland.
Importantly, RHL has not updated the guidance it gave at the time of the interim report, which stated that, assuming normal seasonal conditions, it was targeting “continued strong year-on-year growth” in underlying profitability. The company said at the time that early rainfall across most cropping regions had enabled seeding programs to begin, but that rainfall was still “desperately required” in northern New South Wales and western Queensland. Parts of western Queensland got timely rains in June and August, as did parts of northern NSW, but no-one is rushing to declare the drought in those areas to be over: the Bureau of Meteorology still rates Queensland has having 35-month “serious and severe deficiencies” in rainfall.
Ruralco said at the half that a weaker A$ was positive for all export agricultural commodities, with overseas demand for meat and livestock likely to remain particularly firm. The company said that Frontier International had a strong pipeline over the second half, and was scaling-up to a second vessel to ensure its ability to meet demand. Demand for water services was expected to remain strong, and RHL expected continued demand for high-quality agricultural properties to support “elevated levels” of real estate activity throughout the second half.
Prominent investors including Robert Millner and former Patrick Stevedores boss Chris Corrigan are major backers of Ruralco. The Millner-chaired investment group Washington H. Soul Pattinson owns 20.5 per cent of Ruralco, while the Corrigan-chaired private equity business Kaplan owns 13 per cent.
Ruralco is a well-run business that is potentially a long-term play on Australia’s ability to send food to the emerging economies in Asia. In the meantime, the stock trades on attractive metrics while the market waits on the profit result for the year ending 30 September – and on rain.
