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Special Report: Greener Pastures For Rural Stocks

By Perry Williams, ShareChat Wellington Correspondent

Friday 22nd December 2000

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Farmers are a happy bunch these days. The low Kiwi dollar, along with improving commodity prices and favourable weather, has given the agricultural sector a significant boost. With tech stocks falling out of favour, listed agriculture-based companies are finally seeing a bit more interest from sharemarket investors. But despite the boom on the land, it hasn't yet translated to a strong surge in stock prices. ShareChat Wellington correspondent Perry Williams sorts the wheat from the chaff.

New Zealand's rural sector got a much-needed shake-up yesterday. Almost 15,000 farmers received an early Christmas present when New Zealand's two largest agricultural companies finally agreed to merge, forming the world's 14th largest dairy company. Both the Dairy Group and Kiwi Co-operative Dairies are currently farmer-owned but neither have ruled out the possibility of encompassing private equity. The repercussions are huge. The combined company would have assets of $7.5 billion with a 35 percent share of the world dairy trade. It's widely been seen by analysts as a necessary step for the industry and should do much to bolster interest in the farming sector generally in New Zealand.

Back down on the farm, those who work the land are more than likely plugging a bit of their profit back into stock. And certainly the market is looking buoyant. But is there any real money to be made?

A quick scan of the main listed rural companies probably brings back a few memories for the seasoned investor. And a few changes in the wind. Stocks of interest include market leader Wrightson, corporate dairy farmer Tasman Agriculture, stock and station company Williams and Kettle, Dunedin-based Reid Farmers, agribusiness Dairy Brands, meat exporter Affco and Hawke's Bay meat processing company, Richmond, who plan to list on the Exchange next year.

Wrightson (NZSE: WRI) has probably been the biggest winner among agriculture stocks this year. New Zealand's largest agricultural product and services business returned to profitability with a bottom-line profit of $7.5 million for the year to June, following an after-tax loss of $9.3 million for the previous financial year. There has been criticism though that the profit is pretty lacklustre when compared with revenue of almost $600 million.

The company has also faced some upheaval with the loss of part of its skilled management team and some traditional business, but is looking well-equipped to develop more innovative features. This year, the combination of a good season along with more R&D investment, especially in biotechnology, gave the company a good reputation in international markets,

One analyst who spoke to Sharechat says this year was probably Wrightson's best run for a decade. Its share price hit a high of 68c from a low of 35c earlier in the year and seems to be settling in around 65c. For corporate raider Guinness Peat, which gained a 19.9 percent stake in Wrightson at 40c per share, it's proved to be a sound investment.

Despite the success of New Zealand's rural sector internationally, it's still a minnow in NZSE-40 terms only making up about 6% of listed stocks. That, for a sector, which produces around 25%of our international income every year is fairly unusual.

Tasman Agriculture (NZSE: TAS) has been an interesting example this year of a dairy company expanding its interests.

It began selling its portfolio of farms, which has generated considerable capital. Pressure for that move was thought to come from Brierley Investments, who have a two-thirds stake in the company. Brierley has done fairly well out of its investment, participating in the $1.20 a share buy back earlier this year. But long-term investors who paid $1.60 or more for shares in the past might not be so impressed. The share price is at $1.33, not far short of the year's high of $1.38 and certainly well up on the year's low of 71c.

Tasman, whose profit to the end of May soared 36.6 percent to $12.58 million, has indicated it wants to become a dairy farm management company rather than a farmer itself. One analyst of the stock points out it is ironic that the company is getting out of dairying just at a time when things were looking up. Medium growth is expected but the company may miss out on the real boom. The flip-side of this is that the strong dairy sector means strong demand - and high prices - for the company's properties .

Another dairy sector play, Dairy Brands (NZSE: DBN), posted a healthy $86,000 profit this year after several lean years including a loss of $12 million in 1998. There are still equity issues lingering over Dairy Brands however and the company is yet to have a particularly strong period of growth. It's currently just a few cents under its year high at 42c and may need a few more years of growth under its belt before it becomes a more attractive stock.

Williams and Kettle (NZSE: WKL) - the Hawke's Bay-based rural services company in which Sir Selwyn Cushing is a key shareholder - is reported to be planning a major growth spurt. The company is looking at taking over or merging with a number of listed and privately-owned companies, including Elders and Reid Farmers.

With group turnover of $160 million, the company may be looking to become more involved in the horticultural industry. Certainly analysts point to the company's strong growth - doubling its earnings to $6.4 million last year. Over the past year, the shares have moved from $1.96 to the $3.10 mark earlier this month, and have been trading around $3 this week.

Reid Farmers (NZSE: REI), based in Dunedin, has also had a solid year profit wise (up $600,000 to nearly $4.6 million). The company has Pyne Gould Corp as its major shareholder and has had an encouraging year, up to 95c at one stage, and hovering around the 85c stage for the past month.

Meat exporter Affco (NZSE: AFF) looks to have turned the corner from serious financial difficulty but still looks vulnerable medium-term say one analyst. However, the benefits of $70 million worth of cost-savings are expected to be felt within the next year.

Earlier this month, Affco said about $60 million of shareholder value had now been restored. The stock is currently at 41c, down on year's high of 48c but comfortably ahead of the low of 32c. Despite this, chief executive Ross Townshend said the company was still aware many shareholders bought their shares at 50c.

Probably the most interesting newcomer onto the scene next year is Hawke's Bay meat processing company Richmond, who announced in November it had plans to raise up to $100 million in an offering and list on the stock exchange in March.

It plans to set up a chain of international offices in a bid to get higher prices for its goods. That looks to be a good move and should be met with an enthusiastic response from investors, according to an analyst. The company has moved forward well, posting a profit of $11.65 million for the year to September, up from a loss last year of $852,000.

While the current outlook for many of New Zealand's rural companies is looking much rosier than for some time, many investors remain cautious, well aware that profitability is often in the hands of such vagaries as international legislation, quotas, currency fluctuations and health issues like mad cow disease.

One analyst points out that investors not reading the signs have often missed the boat on small rural stocks such as Reid Farmers, but it's likely it will take more than just one or two good years of good times on the farm for the sector to win back wholehearted investor support.

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