Strong and resilient fundamentals keeps Agribusiness in good health
Wednesday 16 September 2009: The strong and resilient fundamentals of Agribusiness have kept the sector in good health during the past month, with it posting another month of positive returns and expected to outperform the broader market and all sectors, outside of Health Care, on a risk adjusted basis during the next 12 months.
The September Commonwealth Bank Agri Index recorded positive growth for the agribusiness sector of 0.9 per cent during the past month. The S&P/ASX200 index reported 7.2 per cent during the same period, with agribusiness returning 3.0 per cent during the past three months.
Brendan White, Executive General Manager, Commonwealth Bank Regional and Agribusiness Banking said continued depth and resilience of the agribusiness sector as well as strong performances from a number of the companies within the Agri Index have contributed to the sector’s good heath during the past month.
“The sector’s strength is evident during the past month. Two of the largest companies that make up the Agri Index, Incitec Pivot Limited and ABB Grain Limited, have performed exceptionally well and is testament thatthe industry is healthy and on-form to recovery.”
Looking ahead, the consensus forecast return continues to increase as brokers adjust their forecast dividend and earnings figures as they digest the results of the 2009-2010 financial year reporting season.
“For the year to September 2010, the forecast return for the sector is 17.7 per cent, up 5.4 percentage points from last month,” Mr White said.
Mr White also commented that on-farm, supplies in 2009-2010 will be sufficient due to larger than expected carry-in stocks, despite the lowered east coast crop estimates.
“Although we have lowered our estimate of the current Australian wheat crop to 22.2 mega tonnes; the revisions to regional estimates, namely an upward revision to the West Australian crop and downward revision to the east coast crop, are ultimately more important than the headline figure.
“In addition, favourable spring weather conditions are required to achieve yield potentials, and many regions are still delicately poised. Dryness and excessive heat over the next month would curb production estimates. The unfavourable near-medium term weather forecast puts downside risks on these production estimates.”
The Commonwealth Bank September Agri Index confirms the level of mispricing in the sector has declined back into the normal range.
“The combination of revised broker forecasts and the Agri Index remaining stable during the past month has resulted in the sector being closer to its fair value.”
“Forecast volatility for the sector remains high at 28 per cent for the next 12 months. Once again warning investors caution should be taken if entering the market in the coming weeks,” Mr White said.
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Notes to editors:
i. About the Commonwealth Bank Agri Indicators Report
The Commonwealth Bank Agri Indicators is created around three 12 month forecasting models – Fundamental Return (consensus forecasts of earning and dividends for individual stocks in the sector), Exuberance (proprietary measure of market mis-pricing), and Volatility (derived from proprietary methods of modelling realised volatilities, detecting changes in long-run levels and correcting for switchbacks and other correlation patterns in the data).
The Commonwealth Bank Agribusiness index measures the performance of the Commonwealth Bank defined ‘Agribusiness’ sector over time. The Commonwealth Bank Agribusiness sector currently consists of 14 rural-dependent companies: Australian Agricultural Company Limited (AAC), ABB Grain Limited (ABB), AWB Limited (AWB), Elders Limited (ELD), Forest Enterprises Australia Limited (FEA), GrainCorp Limited (GNC), Gunns Limited (GNS), Incitec Pivot Limited (IPL), Nufarm Limited (NUF), Primeag Australia Limited (PAG), Ruralco Holdings Limited (RHL), Ridley Corporation Limited (RIC), Select Harvests Limited (SHV), Tassal Group Limited (TGR). Companies previously included in the sector but since removed due to delisting or exiting the All Ordinaries index include Queensland Cotton Holdings Limited (QCH), Auspine Limited (ANE), Great Southern Limited (GTP) and Timbercorp Limited (TIM).
The Commonwealth Bank Agribusiness index is a non-float adjusted, market-cap weighted index constructed using the same methodology as the S&P index series. To be considered for inclusion in the index, each stock must be a in the All Ordinaries index. The Commonwealth Bank Agribusiness index begins on 3 April 2000 which is the same date as the launch of the S&P/ASX index series in Australia. At inception there were 8 stocks included in the index. This number is currently 14.
The Commonwealth Bank Agri Indicators should be used as a guide only to the performance of the Agribusiness sector, as a way to measure its performance and potential return over the coming months and year.
The Commonwealth Bank Agri Indicators report is attached.
This report has been prepared without taking account the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice. Past performance is not a reliable indicator of future performance. Commonwealth Bank of Australia ABN 48 123 123 124, AFSL 234945. A full copy of the Agri Indicators Report can be obtained by contacting our AgriLine on 1300 245 463 7am to 7pm (AEST time), Monday to Friday.
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