The Australian Agricultural Company or AAco (ASX: AAC) reported that first half earnings from continuing operations before interest and tax (EBIT) improved by 84.4% over the first half in 2011 to come in at $4.4m although the net result after interest and tax is a loss of $4.1m. Managing director David Farley, said that he is confident that the business would be profitable and have positive cash flow in the second half of 2012.
AAco says the climate and rainfall has been good and the cattle herd is at record levels with more than sufficient pasture to deliver on management forecasts for the rest of 2012. The growing global demand for beef has led to generally increasing prices over the long term and short term prices are expected to firm in the second half of 2012. The company has improved the quality of its cattle and increased the herd by over 38,000 head compared to the same period in 2011. The production of high value Wagyu beef continues to increase, and overall sales value grew by 13.7%.
You may be surprised to know that AAco holds the position as Australia’s oldest continuously operating company in Australia, having commenced operations in 1824. It operates across around twenty cattle stations in Queensland and the Northern Territory, occupying some 7.2 million hectares. The company’s primary herd is beef cattle and it is the largest beef cattle owner in Australia currently stocking 680,000 cattle up from 578,000 at the beginning of 2012.
In the first half of 2012, AAco sold 98,306 head of cattle at an average price of $1,056 and it produced cattle growth of 42 million kilograms, a 10.9% increase over the first half of 2011. The company is the world’s largest Wagyu beef producer and Wagyu rose to account for 19% of the company’s sales in this half, compared to 13% last year.
As mentioned previously, the company is working on plans to build a major new beef processing facility in Darwin which will have the capacity to process around 1,000 cattle per day. Australia is the second largest exporter of beef in the world and demand for beef, especially from Asia, is growing strongly.
Most of AACo’s largest competitors are private companies, including S. Kidman & Co., the Consolidated Pastoral Company, NAPCO, Paraway Pastoral and Baldy Bay.
Instead, investors looking for alternative exposure to the agricultural sector in Australia have the option of turning to Graincorp (ASX: GNC), Ridley (ASX: RIC), Ruralco (ASX: RHL) and Elders (ASX: ELD). Meanwhile, products like BetaShares Agricultural ETF (ASX: QAG) offer investors the opportunity to invest in agricultural commodities directly.
AAco has some good growth prospects, given that demand for exported beef is growing and prices are strong. It has extensive land and cattle holdings and reported net tangible assets of $2.13 per share while its shares are trading at about $1.08.
However, agricultural companies face the ever-present prospect of drought , and are currently facing the strong headwind of a high Australian dollar.
The company says that it has been working on strategic initiatives for the last three years which are coming together now to reward shareholders and it is committed to the reinstatement of dividends and to release some of AAco’s store of wealth over the next five years.
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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.