Acct 6003 - Australian Agricultural Company Equity Analysis

ACCT 6003 Fundamental Analysis for Equity Investment

Australian Agricultural Company Equity Analysis

Group members:

 MEIJUN FAN 460139478

                 YIWEI WANG 470361272

                 WENDI XIAO 460125172

SHIYUE YANG 460491952

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1. Executive Summary

Australian Agricultural Company (AACo) is an Australian leading cattle and beef producer incorporated in Australia since 1824. Branded meat sales and live cattle sales are the two main areas generating profits for the company. This equity valuation report will firstly identify key factors driving industry performance and review relevant historical data; following the application of Residual Income Valuation model so as to deliver the intrinsic value of the company’s share price. Based on the method, we recommend a Buy/Held on AACo’s equity.

2. Industrial Background

AACo is not only the market leader of Australian cattle and beef industry but also one of the world’s largest exporter of beef and producers of cattle. On the word of Fast Factor (2016), the gross value of Australian cattle was estimated at $14.3 billion in 2015-16, which consisted a large share of world production. On the aspect of demand, global food consumption is expected to raise to 70% by 2050, specifically in South East Asia (AACo, 2016). Particularly, the middle class in the world is predicted to grow at the highest rate during the next 20 years (AACo, 2016), which means customers with increasing income have capacity and willingness to pay for premium product for greater taste and better quality beef.  

To capture the promising market trend, AACo’s future development strategy will be considered on strengthening leadership position, supplying premium products to target customers and maximizing values from the value chain (AACo, 2016).

3. Historical Performance Analysis

In order to forecast future performance of the company, historical performance shall be assessed at first through the movements of ROE, sales and net debt ratio. More emphasis will be placed on a profitability analysis during past five years from 2013 to 2017.

The firm’s ROE has an increasing tendency rising from -5.34% to 7.63% despite that the figure remained negative until 2015 (Appendix1). The implication is that the net income of AACo was increasing during the period. From 2013 to 2017, sales appeared to increase as well with a significant growth rate at 39.4% (Appendix 1). The increase of sales revenue and net income is a result of the global high demand for high-quality beef and the firm’s strategy to keep live cattle for longer (Zonca 2015). By all means, AACo shall be able to ensure its products quality with its unique strategy to gain loyal customer base worldwide. Moreover, it is worth to note that sales declined 9.6% from 2016 to 2017. According to the report from Curtain (2016), the company’s live cattle sales declined $28 million during 2016, which mirrors that more meat stock is processing via firm’s supply chain than live cattle sales.