3 food shares that could deliver healthy returns for smart investors

Investors have seen a number of new agricultural shares list on the ASX over the past year.

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Costa Group shares

Credit: Didriks

Despite contributing less than 3% to Australia’s overall GDP, the agriculture sector remains an important part of the broader economy and to the country’s own domestic food security.

Not only does the industry supply around 93% of the overall food supply to Australia, but Australian farmers export an estimated $41 billion worth of products annually and have established distribution channels into Asia and North America.

Much has been made about Australia’s ability to become the ‘food bowl of Asia’ and with a number of the world’s most efficient producers in our own backyard, this could eventually become a reality.

There are only a relatively small number of food producers on the ASX, but a number of them have caught the attention of investors recently.

Three of the most promising agricultural companies include:

Capilano Honey Ltd (ASX: CZZ)

Capilano Honey has been a staple in Australian pantries for many years, but the company has started to target export sales into Asia as its next source of growth.

The honey producer generated export sales growth of over 32% in the first half of FY16 and now generates more than 21% of its sales from exports. It has broadened its product range to target different consumer tastes as well as joining with New Zealand-based medical honey producer, Comvita, to produce therapeutic honey.

Issues investors should be aware of are the need for Capilano to secure a constant and growing source of honey to meet demand and that changes to weather patterns can have a large impact on honey production.

Costa Group Holdings Ltd (ASX: CGC)

The company is Australia’s largest grower, packer and marketer of fresh fruit & vegetables and also operates berry farms in Morocco and China. If Australia is to become a¬†‘food bowl of Asia’, Costa is seen as playing a large role in growing and distributing fresh produce to this region of the world.

Costa has been one of the more successful IPOs recently, with its share price increasing by more than 40% since listing in July 2015. The company has met its initial prospectus forecasts and is confident of achieving its FY16 NPAT forecast of $47.6 million.

At the current share price of $3.03, Costa is trading on a price-to-earnings ratio of just over 20. This is not particularly cheap, considering the company is still exposed to the forces of Mother Nature. Despite this, I think the shares will continue to be well supported, especially if the company continues to meet its prospectus forecasts.

Tegel Holdings Ltd (ASX: TGH)

Tegel might be New Zealand’s leading poultry producer, but¬†it’s still worth having a look at when considering agricultural stocks on the ASX.

The company¬†has a commanding position within the New Zealand market as it processes about half of the country’s poultry. It also manufactures and markets a range of other processed meat products and¬†also has an established and growing export business, supplying a range of products to Australia, the Pacific Islands, the UAE and Hong Kong.

The company has only been listed on the ASX for two weeks so investors only have the prospectus information at this stage to make an investment decision. According to the prospectus, Tegel expects to deliver sales of NZ$625 million and NPAT of NZ$43.3 million over the next year.

Australian investors need to be aware of currency risk as Tegel transacts primarily in New Zealand dollars. Food contamination and disease outbreaks are other issues investors should also consider.

Foolish takeaway

Food stocks have enjoyed a great run lately, but it’s easy to forget that they face specific risks that are often outside of their control. For this reason, it is important that investors do not overpay for stocks simply because they have a good story.

With that said, I think the three stocks above could represent good investments for Australian investors if they can be purchased at attractive prices.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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