Daily Market Insights
Global markets traded in a narrow range overnight in what was a relatively quiet night in terms of news flow. US Financials led gains on Wall Street as investors digested President Trump’s budget plan.
As we discussed as recently as last week, one of our key investment themes is that we believe demand for a higher quality diet from a growing middle class in Asia is set to be a multi-year tailwind for Australian & NZ agricultural businesses.
A recent article in Bloomberg highlighted that the Chinese diet is becoming more like that of the average American. According to the article a change in diet is accelerating the search for overseas supplies – Beef sales to China have risen 19,000% in the past decade. Imports of soybeans, used in animal feed, have grown so fast that the government quietly dropped the grain from its self-sufficiency list in 2014.
Last week saw Australian Agricultural Co. (AAC.AX) release a strong full year profit figures which were received positively by the market, with shares gaining +8% after the announcement. Being a producer of beef, we see AAC as a stock which is set to directly benefit from growing demand for meat from the developing world, particularly in China.
Stock in Focus: Australian Agricultural Co. (AAC.AX)
Australian Agricultural Co. recently released its earnings for the 2017 financial year, with operating earnings (EBITDA) of $45m, up $30.1m from last year.
Drilling into the result, encouragingly cost of production was down by 27%, and AAC’s Wagyu and Shortfed beef averaged a 12% increase in sale price per annum over the last four years. The shift to high value beef has resulted in lower revenue, however improved margins and lower cost of production resulted in higher earnings and net profit for the year. AAC has also focussed on vertically integrating its business to now rely more on the price of beef (rather than livestock/cattle prices which are more volatile).
Overall it was a pleasing result. In saying that, investors should bear in mind the risks associated with Agricultural company’s such as AAC.
Members should look out for a full update on AAC to be released in today’s weekly report.
Australia & New Zealand Market Movers
The Australian share market was lower yesterday (ASX 200 index -0.19%) as the ASX reversed early gains as the banks and Mining sectors weighed on the overall market. Negative sentiment around the Miners was driven by comments from Fortescue Metals CEO Nev Power, who warned a Chinese iron ore glut means the price of iron ore could fall further.
The New Zealand market continued lost ground on Tuesday (NZX 50 index -0.33%) as defensive stocks such as Ryman Healthcare and Spark sold off while Xero extended its recent run. In stock news, pharmaceutical and animal health products maker Ebos, has entered a binding agreement to acquire HPS, Australia's largest provider of outsourced pharmacy services to hospitals, for A$154 million.
3 Things Markets Will be Watching this Week
1. US political developments and whether they drive markets for another week.
2. Members of OPEC meet on the 25th to discuss the possibility of another oil production deal.
3. Minutes from the last US Federal Reserve meeting are released Thursday.
Have a Great Day,
Team