Farming for returns

Farming for returns

We were recently asked by a reader why our portfolio currently contains no investments in the Australian food/agricultural sector and we noted internally that this was a very good question to ask.

The short answer is that at Montgomery, we employ a quantitative framework in our initial screens of the stock market which creates our ‘investment universe’. Several companies in this sector have presented themselves as potential investment candidates, for example, TFS Corporation Limited (ASX: TFC) & Tassal Group Limited (ASX: TGR). On closer inspection, these were companies that for various reasons we decided not to pursue further.

But to date, few other agricultural companies have passed the filter and so our energies have been devoted elsewhere.

One issue that is a consistent theme is that the value of many of these companies is primarily driven by the price of the commodity or commodities which they produce and sell. As long term investors, it can often be difficult to develop even a rough idea of how a particular commodity market will play out and hence intrinsic value is hard to determine.

Other companies in this segment have done well by holding assets such as land however, whether this gain will result in eventual operating cash flows is another question.

There is a glimmer of hope on the horizon. As our Asian neighbours literally move up the protein chain, necessity has meant a re-think from the traditional rural model – where value-adding is an important ingredient in a company’s offering.

Companies who value-add (assuming that they have some sort of competitive advantage) should theoretically have a more stable earnings trajectory and would be more likely to be reviewed in the future by our funds.

Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery, find out more.