Agriculture – a Multi Year Theme | Costa Group AGM

2 June 2021

Global equity markets were quiet overnight as both the UK and UK markets were closed for pubic holidays. 

European markets (Stoxx 600 index -0.5%) fell as investors digested inflation data from some of the regions' largest economies. Data showed German consumer prices rose +2.5% year on year in April and Spain's were similarly up +2.4%. The German index was weighed down by Deutsche Bank, whose share price fell -1.3% after reports that the US Federal Reserve said it was concerned about the German lender’s anti-money laundering practices.

One of our medium term investment themes is that a growing middle class in the developing world, particularly Asia, will create multi year demand for food. NZ and Australia have a reputation for quality produce with a clean green image and are in close proximity to Asia. As such, we continue to maintain a positive view on the Australasian agriculture sector as a multi-year growth sector but warn investors to be wary of short term volatility. Agri-businesses face risks such as weather, pricing, supply/demand or other structural risks that can affect the sector such as recent trade tariffs. These have been experienced recently by the likes of Select Harvest, Costa Group, Elders, A2 Milk, and Fonterra. 

Costa Group (CGC:ASX)

Costa Group (CGC) shares slumped -24% last week after their AGM where management said they expect 2021 first half earnings to be only marginally better than the previous year, well off market expectations of ~25% uplift.

Offshore operations continue to be strong, but this was offset by weakness in the local market citing labour shortage and pricing pressure across parts of the business – which we believe to be more transitory than structural. For long term investors, the stock looks oversold, with 2021 improvement anticipated by the market now delayed towards the end of the this year or next year. 

CGC is a good business in our view and still rated as one of our top Aussie agriculture exposures, with leading market position and a higher level of defensiveness versus peers, given its more diversified variety of fruit and vegetables it produces.

However, this is not the first consensus downgrade in recent years, with multiple categories having issues, and a reminder that Costa is an agriculture exposure. We maintain our BUY rating buy with a high risk caveat.


Australia & New Zealand Market Movers

The Australian market was down on Monday (ASX 200 index -0.2%),  but managed to end the month of May up +1.9 %.

Yesterday's decline was spurred by Melbourne lockdown, which given the number of new cases developing could be extended. Financials were weaker as they were most exposed to extension of the lockdown, which may cause the banks to hold off their much anticipated share buybacks – should the lockdown be extended.  

Energy was the weakest sector followed by Technology, and Healthcare stocks were amongst the few to make a gain.

The New Zealand market was up yesterday (NZX 50 index +1.4%) breaking a recent losing streak, as the market is down ~6% year to date. Gains were mainly broad based as investors seek opportunity, in a heavily hit month which only included 5 positive days. 

Port of Tauranga led the market up +3.9%, followed by Tourism Holding and Pacific Edge both up +3.6%. NZ's largest listed company Fisher and Paykel recovered +2% after being sold down after their full year result last week.   

A2 Milk, slipped -0.2% after reports of a potential class action suit alleging the company breached disclosure rules – the milk marketing company replied stating that it had complied with all applicable disclosure obligations. Interestingly, China’s Communist Party said it would allow all couples to have three children, ending a two-child policy that has failed to boost the country’s declining birthrates or address an impending demographic crisis. The move reflected concerns that the rapidly rising number of older people in China could exacerbate a shortage of workers and strain the economy.


3 Things Markets will be Watching this Week

  1. Highlights this week include US Nonfarm payrolls (monthly employment data), and the latest ISM Manufacturing print in the US.
  2. Central bank rhetoric globally remains in focus for investors.
  3. Locally, the RBA takes centre stage on Tuesday along with Q1 GDP in Australia.
Global equity markets were quiet overnight as both the UK and UK markets were closed for pubic holidays

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