Three plays on water and farms – MoneyWeek

Posted by

Ourfundfocusesonwater,agricultureandotherrelatedindustries。

Whileagriculturalcommoditypriceswillnotrisecontinually,globaldemandforbothfoodandwaterisgrowingandthereisnosubstituteforthesegoods。

Assuch,thesectorissensitivetosupplyshocks–andthereforefullofopportunity。

Andtheopportunitiesdonotnecessarilyrelyonrisingprices。

Forexample,alargechunkofourinvestmentportfoliobenefitsfromfallingsoftcommodityprices。

Thatsbecauselivestockfarmersgainasfeedcostsfall,andbrandedfoodprocessorsmarginsriseasinputcostinflationsubsides。

Soacoupleofmyselectedstocksareinsectorsthatwinfromthecurrentfallingrainprices。

ThesefallsareinturndrivenbybenigngrowingconditionsintheUSandthelikelihoodofanear-recordharvest。

MyfirsttipisTateLyle(LSE:TATE)。

Itsanindirectwaytoplaytherecordsugarpriceandadirectwaytobenefitfromthefallingpriceofcorn。

Indiaisthelargestconsumerofsugarintheworld。

In2008domesticproductionwas26milliontons(mt)andconsumptionwas23mt。

Butpoliticalinterventionandmonsoonrainsat20%belowaveragehaveaffectedproduction。

TheIndianharvestisexpectedtobejust15mtthisyear,whichhascausedthepriceofsugartodoublesinceJanuary。

TaterefinessugarandimportsitintoEurope,butitsprofitpotentialisrestrictedbecauseEuropeanpricesarelargelyregulated。

ForTate,thegreatestcontributioncomesfromhighfructosecornsyrupandothersweeteners。

AndrecentpricenegotiationsforsuchsweetenerslookgoodforTate,especiallyasinputcostsfall。

Weestimatethatthestocktradesonamodest6。

5timesEV/Ebitandiswellsupportedbythe5。

5%dividendyield。

OursecondshareisMarineHarvestASA(OSL:MHG),basedinNorwayandtheworldslargestproduceroffarmedsalmon。

Thankstorecentsupplydisruption,producersaresigningcontractswithcustomersovereverlongertimeframesandateverhigherprices。

SupplyproblemsarelargelyduetoChile,whichproducesaround20%oftheworldsfarmedsalmon。

Itssalmonfarmswerepositionedtooclosetogetherandin2008aviruswipedthefishout。

Meanwhile,globaldemandisgrowingsteadilyat7%ayear,creatingasupply/demandimbalancethatislikelytopersist。

Wecalculatethestockisvaluedatonlyeighttimesearnings,despitedeliveringcontinuedgrowth。

MyfinalpickisVeoliaEnvironnement(PA:VIE)。

ThislargeFrenchwaterutilitywaspunishedin2008forcarryingexcessdebt。

However,restructuring,costcuttingandthedisposalofnon-coreassetsisbringingthebalancesheetbackinlineandcashflowsareimproving。

Thelargestbusinessunitsupplieswatertoresidentialcustomers,amarketwhereregulatorsrewardVeoliascapitalinvestment。

Asfearsofadilutiverightsissuesubside,itsstablecashflowwillreceiveafullrating。

FornowthestocktradesonsixtimesEV/Ebitda?