MENU

Why I think this cheap agriculture stock could be a winner

Agriculture stocks often trade relatively cheaply, largely because of significant climate, disease or seasonality risks that companies in this sector invariably face. Huon Aquaculture Group Ltd (ASX: HUO) operates Atlantic Salmon farms in Tasmania and is also susceptible to those risks, though I believe the stock could outperform in the long-term.

Huon was established in 1986 and is the second largest salmon producer in Tasmania, with three major marine sites in the state’s south. Salmon farming is a capital-intensive business, and there are major barriers to entry for potential competitors in the form of strict regulation and environmental controls as well as limited regions where the fish can be produced.

Due to the industry risks I highlighted earlier, Huon and its larger competitor Tassal Group Limited (ASX: TGR) are cheap relative to the overall market, currently trading around 10x trailing earnings per share. Such a low market valuation suggests Huon’s prospects are weak, when in fact the opposite appears to be the case and the company’s balance sheet looks fairly strong.

Huon had statutory earnings of $42 million in FY2017, representing an almost 15% return on equity. Revenues of $260 million were produced from sales of 18,500 tonnes of fish, and management estimates this will rise to 24,500 tonnes in FY2018, an increase of 32.5%. At its AGM held on 30 November, Chairman Mr. Neil Kearney stated earnings were projected to be higher in both FY2018 and FY2019.

Huon believes Australian demand for salmon will grow at around 10% per annum, while maintaining pricing above the long-term average due to supply constraints. Additionally, Huon expects to increase sales in Japan as part of its intended strategy to export to high-performing Asian markets.

Returning to the financial statements, Huon has significant Biological Assets as you’d expect, but pleasingly, a relatively small amount of interest-bearing debt. For FY2017, EBITDA covered interest expense 23x.

Huon generated operating cash flows of a healthy $54 million in FY2017, which are required to pay for the business’ substantial ongoing capital expenditures. Cash payments for capex totalled $35 million last financial year and management expects this figure will be more than $65 million in FY2018, due to production expansion at existing and recently-approved locations.

Another reason why I like Huon is that it is still majority owned by founder, current CEO and Managing Director Mr. Peter Bender. He and his wife and Executive Director, Ms. Frances Bender, own around 66% of Huon, meaning management is likely to be highly motivated with interests closely aligned with other shareholders.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Ian Crane has no financial interest in any company 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.