It’s looking increasingly challenging to find good value stocks with decent outlooks on the ASX following the big bounce in the market, but there could be one sector that looks ripe for the picking.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has bounced more than 9% since the start of 2019 and sectors that I have been overweight on no longer represents good value. This is particularly so in mining although I believe the BHP Group Ltd (ASX:BHP) share price and Rio Tinto Ltd (ASX: RIO) are not overvalued.
But I wouldn’t recommend buying them at this juncture and investors will need to look elsewhere to find value. One sector that seems to be attracting brokers attention is agri-business.
This generally hasn’t been a rewarding place to park capital with many trading at or near 52-week lows – no thanks to the drought, or in Australian Agricultural Company Ltd’s (ASX: AAC) case, floods!
Don’t let the beaten down share prices put you off though as the weather risk appears to be largely factored into the market.
Embattled Elders gets an upgrade
One opportunity that represents value is the Elders Ltd (ASX: ELD) share price, according to Bell Potter as the broker upgraded the stock to “buy” from “hold” even as it cut its earnings forecasts for the company in the wake of its profit downgrade.
Management expects its first half earnings before interest and tax (EBIT) for the six months to end March 2019 to be “materially lower” than the same time last year when it posted an EBIT of $45.7 million.
Elders blames lower wool volumes, poor summer cropping and increased costs for the downgrade and said that FY19 underlying net profit is likely to range between $61 million and $64 million compared to last year’s figure of $63.7 million.
The guidance is well below the $71 million net profit that Bell Potter was expecting for the current year and the broker was forced to lower its price target on the company to $6.70 from $7.35 a share as a result.
If Elders were to achieve its guidance, weather during the winter season will need to be more conducive or the company could see $10 million to $15 million lopped off its earnings before interest, tax, depreciation and amortisation (EBITDA), noted Bell Potter.
“However, based on normalised earnings (i.e. assuming a summer crop) and utilising a conventional EV measure (ex-tax losses) we see ELD trading at ~10x EBITDA, a discount to its post recapitalisation average of ~11.2x,” said the broker.
“While seasonal risk remains, we believe we are now at that point of the cycle where we are buying seasonal downgrades in agricultural stocks and upgrade our rating from Hold to Buy.”
Nufarm is value-enriched
Elders isn’t the only one facing a tough first half result season. Crop protection and seed company Nufarm Limited (ASX: NUF) is also likely to post a drop in earnings when it posts its results in two days.
But Credit Suisse is urging investors not to get distracted as the stock represents a good buying opportunity for the patient investor due to its soon to be released omega-3 enriched canola seed product.
“Whilst investors have been reluctant to factor in upside from NUF’s omega-3-rich canola oil due to the long-dated nature of the opportunity, first commercial revenues during 2019 should see focus increase,” said Credit Suisse.
“We believe that there is a compelling story built on supply constraints on conventional fish oil and NUF’s oil at the lower end of the cost curve compared with alternatives. We estimate A$125mn in incremental EBITDA from this initiative at maturity.”
The broker has an “outperform” recommendation and $9.53 price target on the stock.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Nufarm Limited, and Rio Tinto Ltd. The Motley Fool Australia has recommended Elders Limited. 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 Scott Phillips.
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