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Stocks
Stock of the week – ABB Grain
June 12, 2008
Tim Morris, wise-owl.com analyst
Company: ABB Grain
Code: ABB
Recommendation: Spec Buy
Market Cap: $1.4bn
A few months ago we profiled ABB Grain as our preferred pick in the local grain sector in light of strong macro themes driving global soft commodity prices. However, we rated the stock as a ‘hold’ due to uncertainty surrounding the stocks value proposition and its earnings outlook.
For those not too familiar with the stock, ABB Grain originated from the Australian Barley Board (ABB), which was established in 1939. After being privatised in July 1999 the company was listed as ABB Grain in July 2002. The company acts as an intermediary between buyers and growers within the grain market, providing storage, processing, logistics, marketing and trading services along an integrated supply chain. ABB operates in both Australia and New Zealand across a range of agricultural commodities such as barley, wheat, sorghum, canola, oats, field peas, faba beans, triticale, chickpeas, lupins, lentils, rye, safflower and maize.
ABB exports to around 40 countries from storage facilities across Australia, although mostly from South Australia where it has 111 silos and seven export shipping terminals with a capacity of 10 million tonnes. ABB is also one of the world’s largest producers of malt. Its malting division, operating under the guise of Joe White Maltings, hosts the largest malt production network in Australia, producing over 420,000 tonnes annually. In recent years ABB has also extended its operations across other rural services including fertiliser and agchem supply, financial services and insurance, and wool and livestock activities.
Because of its role as an intermediary between buyers and growers, ABB’s earnings are very dependant on grain volumes or ‘receivals’, as it collects fees for selling, collecting, transporting and storing grains on behalf of farmers. So although prices have been strong, the company’s earnings have suffered in recent years due to lower volumes arising from the drought.
It is on these drought affected earnings figures that the stock’s valuation appears very stretched, trading on a PE of almost 200. However we have recently become satisfied with the factors that could drive a turnaround in both earnings and the share price.
One such factor was a better than expected half year earnings result, as earnings rebounded strongly by 77% to $33.6m. The result prompted management to lift their profit forecasts for the full financial year. The other factor was a report from competitor AWB that general conditions in the rural sector for wholesalers, retailers and service providers have been improving.
ABB has recently diversified into this field, establishing rural trading operations across wool, fertilizer, livestock, financial services, and real estate. Although the division posted a $4.2m loss in the last half, dragging on ABB’s overall result, it has been flagged as a major growth driver moving forward. This rural services segment was formed through several acquisitions, so the operations are integrated and the kinks ‘ironed out’, we see strong potential for a significant bottom line contribution given it generated $126m or 20% of overall revenues.
The push into rural services is just one of one of eight strategies that the company has outlined as key growth drivers over the next 3 years. Overall these initiatives are aiming to deliver an additional $60m to full year EBITDA by 2011. EBITDA for the last half year, when most of the company’s money is made, was $85.8m.
In light of this proactive approach from management and the sniff of improving trading conditions, we rate the stock a ‘spec buy’ for investors seeking exposure to the soft commodity and agricultural sectors. The stocks recent pullback from record highs due to a placement should provide a good entry point for investors.
We regard the recommendation as speculative because the stock’s high current valuation suggests that the market has already priced in some improvement in trading conditions. We are betting on a sustained improvement, which is out of the company’s control. Another bout of testing weather conditions could be all that’s needed to cloud the outlook beyond FY08, in particular a lack of rain around the Murray Darling basin in the nation’s south east. A risk specific to our recommendation is the possibility that the recently established rural services business fails to perform as expected.
Given the risks involved, in addition to acting on our recommendation, it is prudent for investors to keep track of the company’s progress, which is what we will certainly be doing for members.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
More articles from this edition of CompareShares:
Share tips: Broker stock recommendations 12 June – 6 to BUY, 6 to SELL and 6 to HOLD
Fundamental Analysis: Top 5 financials to know about a company
Financial planning: The Budget and your financial plan
Stocks: Stock of the week – ABB Grain
Oil crunch: Profiting from the oil bull, and correction
Minerals: SA mining prospects better than WA: Rann
Commodities: Oil prices 'getting too much attention'
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