The dining boom

With the mining boom at an end, the dining boom has certainly fuelled the Australian agricultural sector. This sector is 5 percent of the Small Ordinaries and has been a source of great returns over the past few years.

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Where are the best opportunities in the Australian food and beverage sector?

 

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Michael Glenane
Leigh Cronin
Executive Directors,
Fairview Equity Partners

With the mining boom at an end, the dining boom has certainly fuelled the Australian agricultural sector. This sector is 5 percent of the Small Ordinaries and has been a source of great returns over the past few years. With the currency dropping 30 percent our farmers have become far more competitive offshore. The sector does have its risks – the biggest is the weather. The Southern Oscillation Index is looking pretty ominous for the next 12 months, which will be tough on Australia’s eastern states farmers, but wet elsewhere, particularly the western regions of the Americas. Our farmers are now more hardened – they’re experienced with drought conditions and they are also more financially resilient. They have access to capital from international buyers and they now finally have access to domestic capital again. We are happy to fund growth and open to new ideas with strong organic growth potential.

In terms of stocks we’re focused on, we think Costa is a great opportunity. As the largest berry producer in Australia, the company has a natural market as it’s very difficult to import fresh berries. Berries are a high value-to-weight product with good growth, especially raspberries with double-digit per capita consumption increases in Australia. The company is also using innovative technology to improve yields over the next 12 to 36 months.

We’ve also invested in Freedom Foods Group, which caters to the globally growing market of allergy sufferers through food and non-dairy beverages that are allergen free. These include almond milk and the soy, cereals and snack markets in Australia, North America and Asia. Its investment case is that it’s a scalable, low-cost manufacturer in a strongly growing niche market. It has invested across the value chain in manufacturing facilities, supply arrangements and in cleverly acquiring tuck-in businesses.

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Tiernan White
Head of Family Business
and Intergenerational Wealth,
NAB Private

Quality, reliability and scale. These are the three key words that feature in investment propositions across the food sector and criteria to keep in mind when assessing investment opportunities.

We’ve based our comments here on discussions with many business owners who are customers of NAB and are considering the longer-term future of their businesses. Our experiences highlight some consistent features, specifically:

  • food businesses are often capital and time intensive, taking a number of years to develop. Success in many cases is impacted by conditions such as climate and weather that are beyond the owner’s control, demanding resilience;
  • changing lifestyles, work preferences and trends in consumer behaviour are driving growth opportunities. Businesses that follow emerging trends for convenience, ready-to-cook meals for busy families and catering services that focus on the ageing population are all experiencing new growth;
  • food producers are leveraging export opportunities founded on Australia’s reputation as a clean and green producer.

Those features point to the value of patient capital, where the business owner’s passion for success may take precedence over the drive for immediate investment returns. Mastering production quality in the short term is a prerequisite to enhanced investment returns in the longer term.
A second common investment feature is the value of reliable business systems, where processes are clearly defined, documented and applied to deliver consistent quality produce.

At NAB we strive to support business owners as they grow their companies and also at the time when they realise their investments. We’ve seen recent examples where food businesses have pursued new consumer trends and others that have expanded into export markets leveraging the quality of their product. We’ve also seen successful investment exits where business owners have created success, founded on quality and consistency of product, and the new investors have been attracted to the opportunity to pursue increased returns by further scaling the business.

This article was first published in Private Word magazine (Summer 2015). Private Word is also available in an App for Android and iTunes users.

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