Volatility and reporting season drive drop in agribusiness
17 February 2009
Volatility in global financial markets has had a major impact on Australia’s listed agribusiness sector as recent data reveals a significant decline in sector performance in February as companies begin reporting interim and full year results.
According to the February Commonwealth Bank Agri Indicators the agribusiness sector has fallen by a considerable 20.8 per cent, against the broader S&P/ASX200 which fell by 6.5 per cent during the month.
Dale Champion, Acting Executive General Manager, Commonwealth Bank Agribusiness said the sector had been biding its time until the 2009 reporting season.
“Dividends and earnings have been downgraded by a number of key companies making up the index,” he said.
Incitec Pivot (IPL) recently issued a profit downgrade for its 2009 full year net profit after tax (NPAT) to A$450 million, well below previous consensus of A$675 million. IPL is down 25 per cent over the past month. The company has also revised its ammonium nitrate (AN) demand growth forecast in the medium-term and as a result is slowing construction of its AN facility at Moranbah in Queensland to better align demand and supply.
Futuris Corporation Limited (FCL) also revised its forecasts as a result of sharply lower trading conditions for the month of December with an underlying net loss after tax, previously forecast at A$9 million, now anticipated to reach an approximate loss of A$23 million.
“These profit downgrades impact the performance of the agribusiness sector significantly. It is not surprising there has been a drop in the Agri Indicator during the February 2009 reporting season,” Mr Champion said.
Mr Champion added, with agricultural organisations significantly downgrading profit forecasts and investment analysts devaluing stocks based upon future earnings potential, it is of no surprise that there may be more volatility ahead. However, despite this potential short-term volatility, the agribusiness sector is still expected to out-perform the broader market. It is also reassuring that analysts have not revised the longer term outlook for the sector to a negative.
“Agribusiness is expected to return 11 per cent over the next 12 months compared to 7 per cent from the broader market. On a risk adjusted basis, Agribusiness is in the middle of the pack. The Materials and the Energy sectors both have negative forecast earnings over the next 12 months,” Mr Champion said.
The key message for investors in the agribusiness sector remains to stay focused on the long-term, with the 12 month outlook for the sector still forecasting positive returns.
“In the current climate, it is impossible to avoid market volatility. However confidence in Australia’s listed agribusiness sector should remain high given the fundamentals of the sector remain strong and well-positioned to overcome short-term challenges.”
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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 16 rural-dependent companies: Australian Agricultural Company Limited (AAC), ABB Grain Limited (ABB), AWB Limited (AWB), Futuris Corporation Limited (FCL), Forest Enterprises Australia Limited (FEA), GrainCorp Limited (GNC), Gunns Limited (GNS), Great Southern Limited (GTP), 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), Timbercorp Limited (TIM). Companies previously included in the sector but since removed due to delisting or exiting the All Ordinaries index include Queensland Cotton Holdings Limited (QCH) and Auspine Limited (ANE).
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 16.
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.
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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