Sector financial performance:
This company, who provides oilseed related service and processing, has been grouped in agribusiness and oilseeds processing sector of food industry.
Factors that influence demands for commodity and products that companies purchase and process mainly include demographic development and demands for meet protein/animal feeding. Our data indicates that the global demands for agricultural commodity and processed oil and animal feeding protein seem to be rebounding in 2018 after continuing decline of several years, which can be partially attributed to declining demands for meet protein from pork and chicken.
Stronger demand seems to be supported by 2-3% annual growth in sales volume in 2017/18 from some of typical companies in this sector as compared with the average sales volume’s decline (at about 2% annual rate) in 2015/16. It seems the profits and cash inflows of the companies in this sector have been determined to larger extent by the margins since cash flow is obviously more sensitive to changes in margins when margins are relatively at low level.
As we know, in the agribusiness the margins are directly related to changes in commodity price, which are usually volatile in a large range. While the changes in commodity prices can be passed on to the prices of final products, due to time delays or use of future contracts, companies’ operating margins and thus operating incomes fluctuated during the time when commodity price are volatile as a result of changes in supply and demand. The average operating income in this sector decreased by 20-50% annually in 2016/17 when the commodity price went up but sales did not yet. However, as sales caught up and the rise of price slowed down in 2018 we have seen a large improvement in operating income of those companies (an average 120% annual growth).
Therefore, the companies’ fluctuated financial performances for some certain years have been determined to large extent by the volatile commodity prices and in the long run it generally has nothing to do with how the companies use derivatives to mitigate the impacts from trading market. It may be helpful in planning your budgets but not in improving income. Therefore, since we are not able to predict the changes in commodity prices, which are related to the whole agricultural environment and get involved with many uncertain factors we are not going to predict the agribusiness companies’ financial performances including operating income or cash inflow. Focus should be given beyond cycle of commodity prices fluctuation.
According our data, the sector‘s average enterprise price/EBI ratio has been fluctuated (relatively stable price of stock), a signal that capital market filtered the part of impact to the stock price from commodity market. We think a multiple of 20-26 may be appropriate to reflect the stability of cash flow generation and security of assets among companies in this sector.
It seems that demand for process oils and proteins of animal feeding has been strong since 2017 as indicated by the sales volume of related products of this company. Price of those products seems to be rebounding and solid as well.
For first nine months of fiscal 2018 compared with same period of 2017 (ended 20180930)
Sales of oil seeds and processed oil products increased about 3% due to increase of 2.9% in sales volume.
For fiscal 2017 compared with 2016 (ended 20171231)
Sales of oil seeds and processed oil products increased about 7% due to increase of 6% in sales volume.
It seems the global demands for this company’s agribusiness products, mainly oil seeds and processed oil and proteins, have been consistent as indicated by its sales volumes (flat in 2016 and 3% down in 2015). However, due to deceasing commodity prices, especially soybeans, its sales numbers went down by 4% and 26% in 2016 and 2015 respectively. The sales increased by 17% in the first 6 months of 2017 attributable to increase in volume (7%).
When commodity price/cost significantly decreased in 2015, while offset by the decreased total sales number, this company’s operating income increased and its gross margin both went up by 35%. However, as commodity price’s downturn slowed down and even went up again when entering 2016, what we see is the significant decrease in gross margins (down from about 6% to 4% in 2017) and shrinking operating income (down by about 70% in 2017). As the upward trend in commodity price slowed down and demand turned to be stronger in 2018, we have seen improved margin for this company and increase in income.
This company’s low margins present a typical performance as a company in agribusiness sector: its current gross margin, operating margin, and cash inflow margin are about 5%, 2%, and 0.7%. However, the fluctuated margins and income, while presents a natural result of volatile commodity market, should have caused huge troubles for this company to manage its budgeting and we think that this company may want to give more buffer for its inventory management and be more flexible in purchasing of commodity in future contract market.
Our valuation methods and analysis indicate that the market corrected its underestimation it did about this company in the 2015 and 2016 (failed to see its real value during volatility of commodity price), but may probably have overestimated it now. Its multiple of enterprise price/EBI of 31 and of enterprise price/sales of 035 may be relatively high compared with its peers.
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