AAco in a bull market

The long term trends look good for this company

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The Australian Agricultural Company or AAco (ASX: AAC) was established in 1824 and is the oldest continuously operating company in Australia. It is the custodian of over 7.2 million hectares on twenty or so cattle stations spread across Queensland and the Northern Territory. Combined, these stations represent about 1.1% of Australia’s total land mass which means that this company controls more land than the whole country of Ireland!

The main business is beef cattle and it is the largest beef cattle owner in Australia. The company owns more than 600,000 head of cattle and is the world’s largest Wagyu beef producer. AACo is working on plans to build a major new beef processing facility in Darwin which will be the only beef export processing facility in the Northern Territory.  Australia is the second largest exporter of beef in the world and demand for beef, especially from Asia, is growing strongly.

An undiscovered local gem?

At a recent stockbroker’s conference, AAco’s chief executive David Farley said that foreign capital has been flooding in to snap up Australian agricultural assets but local investors don’t seem to recognise the ongoing boom in ‘soft commodities’. However local entrepreneur Dick Smith, after expressing concern about foreign ownership, visited some of the AAco properties and bought about $1 million worth of shares. “I don’t have a great deal of knowledge about the company but I just wanted to own land. The Chinese are buying up a lot of it.” Mr Smith said. Even after this purchase, the company still only has about 20% local ownership.

AAco says that it has been working on strategic initiatives for the last three years which are coming together now to reward shareholders. Recently, the climate and rainfall has been good and the cattle herd is at record levels. The growing global demand for beef has led to generally increasing prices over the long term. The company has improved the quality of the cattle and produced over 150,000 calves in 2011. High value Wagyu production is increasing and in 2011 overall sales grew by 32% in dollar terms with EBITDA up by over 40%.

The other large cattle companies in Australia such as S. Kidman & Co., the Consolidated Pastoral Company, NAPCO, Paraway Pastoral and Baldy Bay are all private companies and so there is no direct alternative investment to AAco.  Graincorp (ASX: GNC), Ridley (ASX: RIC), Ruralco (ASX:  RHL) and Elders (ASX: ELD) all operate in the agribusiness sector in Australia, while the BetaShares Agricultural ETF (ASX: QAG) offers investors the opportunity to invest in agricultural commodities directly.

Foolish takeaway

AAco has some good growth drivers in that demand for exported beef is growing and prices are strong. It sells branded products and good quality control leading to premium prices. The company has extensive land and cattle holdings and had Net Tangible Assets at the end of 2011 of $2.15 per share while its shares are trading at about $1.08.

The weather has been good for AAco over the last few years but, while the geographic spread of cattle stations provides some protection against drought, this is always a concern for agricultural companies. The strong dollar is also no help to exporters. 2012 is likely to be a good year for AAco but any dividends are probably at least a year away and even then are likely to be modest.

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Motley Fool contributor Tony Reardon owns shares in Graincorp. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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