SGLLV: People always need to eat

Ricegrowers (ASX:SGLLV) also known as SunRice, is a global Fast Moving Consumer Goods business focused on rice and related products. It commenced as a growers cooperative in the Riverina district in South East Australia which is one of the country’s prime food growing regions. It has now grown into a global business, sourcing rice from many different countries and selling into a wide network of countries.

Ricegrowers revenue is sourced from five main segments. The breakdown of revenue from the first half of FY24 is shown in the chart below.

The Rice pool relates to the original part of the business whereby growers from the Riverina district sell their rice harvests into the business. This segment then derives its revenue from selling the rice to external customers or selling it at arms length prices to other segments within the group. About 25% of the Rice pool revenue comes from inter-segment sales. That is why there is an eliminations segment in the pie chart to back out those internal sales. The producers are paid a price per paddy tonne for their rice harvests, called the pool price, which takes into account the prices received from the sale of rice along with the costs involved in getting the rice to market. As such, the Rice pool segment does not make a profit as outgoings are always equal to revenue. The growers who are supplying their rice to the pool all have an ownership stake in the business which will be explained below.

The international rice segment is the largest component of revenue at 46%. They sell rice into a wide range of countries, especially the Middle East and the Pacific nations. In addition to sourcing rice from the rice pool, they also source rice from a wide network of other countries. Favourable conditions over the first half enabled them to increase revenue by 26% and profits before tax soared by 163%. This segment faces risks from currency fluctuations. They have a significant business in Papua New Guinea and there is no facility in international FX markets to hedge the Kina. The depreciation of the PGK put pressure on their margins.

CopRice makes feedstock and dog food. It accounts for about 14% of revenue and has an EBITDA margin of 6%. The Rice Food segment has the highest EBITDA margin at 7.8% and the Riviana Foods segment has the lowest at 1.6%.

EBITDA grew 48% in the first half of FY24 driven by the International Rice division as well as CopRice. The overall EBITDA margin is 6.9%. Like most agribusinesses, they tend to operate on fairly tight margins. The operating margin is 6.1% and the average net profit margin over the last five years is 2.8%.

The improving performance of the business has led to an improvement in the return on equity to 12% and the return on capital to 16%. This feeds into the quality score of 91.

Ricegrowers was included in the 2024 NAPS portfolio as one of the top two Consumer Defensive stocks with a StockRank of 99. To date it is performing well, with a capital gain of 5.5%.

Ricegrowers has a dual share structure. Class A shares can only be held by active rice growers. They have voting rights but no rights to dividends. Class B shares are traded on the ASX and can be held by the general public. They are entitled to receive dividends but they do not have voting rights. The size of a class B shareholding is limited to 10% of the total class B shares. The dual share class structure places a ceiling on the value of shares as there is no possibility of a takeover offer. Thus investors need to be aware that they are likely to have a persistent valuation discount.

The Value score of 98 reflects this valuation discount. The compensation is a fully franked dividend yield of 7.8%. The combination of a forecast PE ratio of only 6 and forecast EPS growth of 12% leads to a PEG ratio of 0.6 which implies that the stock is cheap relative to its growth prospects.

Being an agribusiness they are subject to a range of risks, many of which are outside their control. This also contributes to the lower valuation metrics. Their main product, rice, is priced in global commodity markets. Therefore, they are primarily a price taker and are impacted by supply side risks. For example, a drought in the northern hemisphere helped to hold up prices for rice and increase demand for Australian rice. But now that the drought has broken, the increased supply of rice is adding more competition in the US market.

Shipping is another external cost that has a significant impact on profitability. For the most part, shipping costs have come down as things have normalised after the pandemic, but costs blew out again towards the end of 2023 following the conflict in the Middle East and disruptions in the Red Sea.

Source: Sunrice, Update from Sunrice Group: March 2024, 7/3/24

Water access rights are also a risk that cannot always be managed. Rice production is water intensive. The Federal government is currently considering a new bill, the Water Amendment (Restoring Our Rivers) Bill 2023 which would potentially create a significant increase in the cost of water rights impacting the profitability of the Riverina rice growing operations. Sunrice group have made a submission to the Senate Standing Committee looking into it.

Ricegrowers StockRank of 99 reflects a high quality business, trading at a reasonable price with momentum heading in the right direction. As outlined, there are a number of risks to consider including being a commodity business and the dual share structure. It is unlikely that it will be a high growth business, however it provides a strong income yield whilst still having some growth potential.

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