ARC delivers profit and is upbeat on cattle prices

Name: Australian Rural Capital Ltd

Market Capitalisation: $9 million

Closing Share Price: 69 cents

Australian Rural Capital (ARC) has reported an after tax profit of circa $1.3 million for fiscal 2018.

This is the first significant profit that the group has recorded in the past three years, since the recapitalisation and establishment of the company into the current business model.

The result was primarily driven by the uplift in valuation of its investment in Namoi Cotton Co-operative Capital units and the subsequent conversion to Namoi Cotton Limited ordinary shares in a new public company.

Operating costs were maintained at moderate levels as the company sought to develop the fund management business opportunity, and this remains an important objective.

The Net Tangible Assets (NTA) at June 30, 2018 was 60 cents per share compared to 49 cents a share at June 30, 2017.

Namoi Cotton a key driver

Management noted that the company’s share price currently trades at a premium to the NTA, which it believes reflects the significant business opportunity in managing assets in the agricultural sector, along with the financial benefits of the group’s stake in Namoi Cotton.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

However, management’s objective is still focused on the development of a business that is valued on earnings and earnings potential along with creating value in its investments.

Increases shareholding in Namoi Cotton

ARC has increased its shareholding to 13,471,111 shares in the new company Namoi Cotton Ltd, which represents a 9.73% holding of the currently issued ordinary shares.

The company recorded a full year profit to February 2018 of $6.8 million, with positive cashflows of $17.3 million driven by greater ginning volumes and cotton seed trading margins.

The outlook and guidance presented at the annual general meeting for the current season earnings and year to February 2019 was a forecast of net operating cashflows from operating activities in a range between $18 million and $23 million.

This range is speculative and investors should seek professional financial advice for further if considering this stock for their portfolio.

Cattle Market and Financing

The significant drought conditions in eastern Australia have contributed to the increased supply of all classes of cattle resulting in the Eastern Young Cattle Indicator (EYCI) index now trading at approximately 480 cents per kilogram.

ARC has been of the view over the past two years that cattle prices would come back to levels below 500 cents per kilogram, having peaked at 750 cents per kilo in late 2016.

The group is now changing its position and have turned very positive on cattle and beef prices.

Recovery in cattle prices

ARC believes that the record numbers of female cattle being killed and increased global demand for lean and premium beef, assisted by a soft Australian dollar bodes well for an explosive recovery in cattle values when the drought conditions break.

The group is very positive on the medium-term outlook for beef prices, particularly on grass fed and natural production systems and supply chain opportunities.

ARC is also exploring a considerable opportunity to provide working capital and livestock finance in the sector, in response to producer enquiries.

Management aims to evaluate, consider and conduct analysis on these agricultural supply chains to identify the sweet spots of returns and strategic value in order to make astute investments.