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Ruralco Holdings Ltd posts massive profit increase: Should you buy?

Today, diversified agricultural company Ruralco Holdings Ltd (ASX: RHL) released a positive FY14 report to the market. Resulting in its share price trending slightly higher around midday.

The group saw underlying net profit rise 78%, on a 21% increase in sales revenue. Here are some other key takeaways:

  • Net debt dropped 30% to $37.9 million
  • Gearing of 17.1%, compared with 33.7% last year
  • A final fully franked dividend of 8 cents per share, taking the full year payout to 16 cents per share
  • Earnings per share of 15.27 cents, up from 10.49 cents
  • Operating cash flow of $17.68 million, down from $24.99 million
  • Rural supplies revenue jumped 14% to $1.135 billion, with stronger margins
  • The Agency division (which includes Real Estate, Livestock and Wool) witnessed gross profit jump 19%

Commenting on the 78% rise in underlying NPAT Managing Director John Maher said: “The result emphasises the increasing quality and diversity of our earnings given the sustained drought in Queensland and northern NSW and the dry conditions in the final quarter across much of southern Australia that has seen a reduction in winter crop yield prospects.”

Operationally, Ruralco had an eventful, but mostly successful year. For the year ended 30 September 2014, key activities included the divestment of Elders Ltd (ASX: ELD) for 23 cents per share, the sale of a 50% holding in Lachlan Fertilisers, and divestment of surplus property in Tasmania. These have freed up capital to be put to better use.

For example, the group’s $71 million spent on the strategic acquisitions of Frontier and Total Eden in February 2014 have provided Ruralco with sound growth prospects moving forward. The Eden acquisition, which expands the water portfolio, provides a much needed hedge, “when cyclically low rainfall periods challenge earnings in the traditional rural supplies and agency activities.”

Buy, Hold, or Sell?

Ruralco shares trade on a trailing 4.6% fully franked dividend yield and have achieved an average total shareholder return of 13.9% over the past five years. According to the company’s full year results presentation, it achieved a return on capital employed of 17.1% and return on equity of 9.8%, excluding its recent acquisitions.

Given its performance in recent years, I believe Ruralco can provide great exposure for investors looking to play a number of macroeconomic themes. Indeed the collision of economic tailwinds such as the falling Australian dollar, increased foreign investment in agriculture, improving trade agreements with Asian countries (i.e. Australia – the ‘food bowl of Asia’) and an increase in property prices will all serve to bolster Ruralco’s earnings over the long term.

Mr Maher noted the group still faces a number challenges moving into FY15, such as below-average rainfall in many regions, but said: “Australian agribusiness fundamentals continue to be attractive with robust export demand for Australian grain, meat, other fresh produce and breeding stock as well as increased interest in rural properties offering production leverage to these preferred commodities. While the implications of the China Free Trade Agreement are yet to be fully understood, its announcement last night augurs well for Australian agriculture and Ruralco.”

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the companies mentioned. 

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