Post-COVID-19 will be an ‘unprecedented opportunity’ for small cap food stocks
Food & Agriculture
Food & Agriculture
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Times are tough for small cap food stocks seeking to export to Asia, with COVID-19 making international trade difficult right now.
But, like pre-COVID-19, Asia will again be a big opportunity for small caps looking to break into the market.
A2 Milk (ASX:A2M) has reaped the rewards of its push into China. Five years ago it was trading at 54c but is now over $18 — a gain of over 3000 per cent. And Tasmania-based salmon farmer Tassal (ASX:TGR) has tripled in value since 2012 thanks to its ties to the Asian powerhouse.
Non-listed companies, like contract food service company Compass Group, have also witnessed growth after capturing a share of the Chinese market. Compass employs 66,000 people across Asia providing 270 million meals per year.
Compass’ Asia Pacific managing director Mark van Dyck told Stockhead it was almost time, if not already, for the next generation of companies to pounce on the opportunity, specifically in the premium space.
“88 per cent of the next middle class will be born in Asia – they’re no stranger to food,” he said.
“Even pre-COVID Asia had a focus on quality and transparency in their food systems and there’ll now be a higher, augmented focus on that.
“I think we have to learn from New Zealand. Some years back they set a goal to build trade in Asia, the government got behind it, businesses supported it and built a trusted country brand. They recently eclipsed Australia and the US as exporters of food to China.
“Brands like A2 Milk, Tassal and TWL are examples of businesses doing [this], we just need a lot more. I feel there’s a bounce and it’s a unique chance for our business.”
Businesses should be preparing to pounce on this lucrative opportunity now, rather than waiting until the crisis is over, according to van Dyck.
“Planning needs to begin now because of signs China is coming out of this,” he explained. “Brands like McDonalds, KFC and Starbucks have more than 95 per cent of their stores open.
“And other parts [of Asia] are showing signs that they will accelerate soon, looking for new trade partnerships. Particularly countries like Singapore, which imports 91 per cent of its food.”
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One opportunity is in infant formula, as evidenced by success stories like A2 Milk. Rabobank analyst Michael Harvey puts this down to the value proposition of the product generally and individual brands.
“A2 have been very successful even before the coronavirus outbreak in terms of building a market and a brand with a multichannel strategy and value proposition,” he told Stockhead.
“It helps that they have easy access to the market and a strong value proposition.
“In the short term, discretionary items take a hit in price sensitive markets and you may see trading down. But some [companies] do well if they’re a comfort food or premium brand.
“Mums won’t trade to a lower branded formula if they don’t have to.”
There are over a dozen small caps trying to crack the Asian market but for the time being the success stories are limited.
Bellamys (ASX:BAL) was one of the lucky ones, snaring itself a lucrative takeover deal from Chinese dairy group Mengniu last year.
There are also small caps in seafood that are focused on exporting to Asia. These range from companies supplying conventional foods such as salmon and kingfish, to companies supplying some slightly more exotic options like sea cucumber and ling maw (bladder).
New Zealand Coastal Seafoods (ASX:NZS), which sells ling maw, is the best performing food and agriculture stock this year. It has gained over 40 per cent.
The reason it is shown as down 97 per cent in 12 months is because it listed from a reverse takeover of now dormant internet platform company xTV Networks.
One advantage for the sector generally, particularly New Zealand Coastal Seafoods, is that food companies are deemed an essential business, meaning those in the industry aren’t forced to close their doors during the pandemic.
The biggest seafood stock on the ASX is Tassal.
Last week Goldman Sachs tipped it to rise to $5.05 over the next 12 months, from $3.90 on Friday. The company remains on track to deliver on its production targets and has been boosted by favourable conditions.
Goldman Sachs also tipped fellow Tasmanian salmon firm Huon Aquaculture Group (ASX:HUO) for growth — to $4.50, from $3.85 on Friday.
Rabobank’s Harvey warns that although there is an opportunity in Asia, it is a crowded market.
“Clearly the opportunity for food and beverage in Asia is there given the fundamentals – big population bases, they’re not a surplus food producer and have consumers that want safe high-quality products,” he said.
“But it is also an opportunity for [firms] all around the world. There are companies in the UK, US and NZ wanting to enter too.
“Potentially longer term there might be more people using e-commerce; that might open up the opportunity for more firms to enter easier.”
Goldman Sachs has also warned that shortages in seasonal labour and export logistics may be challenging in the short term. However, the Morrison government has committed to spending $110m to subsidise airfreight for agricultural exports.