Australia has built a formidable supply chain in the agricultural sector to efficiently move commodities from farm gate to export markets. But logistics is a choke point with handling, storage, provenance and traceability, export accreditation and documentation being key assets and capabilities where competition may be limited and with high barriers to entry given the lengthy accreditation and approval process.

Cereal fodder, especially oaten hay is an important dietary source for dairy cattle and has a major bearing on milk quality. With rising demand for milk, especially fresh milk, in Asia, there is a growing shortfall of fodder for local herds which Australia is well placed to fill due to proximity and free trade agreements.

The meat export market is valued at over $11 billion and is growing strongly due to a combination of rising demand in Asia and falling live cattle and sheep exports to the Middle East which are likely to be replaced by chilled and frozen meat.

In both markets, handling and storage capacity are bottlenecks and export accreditation critical. These are areas where Wingara excels.

Further these assets provide enormous insights and information into the highly fragmented but commoditised growing sector of the industry providing the potential to build long term grower and producer relationships with a view to providing a broader range of value-added services over a wider range of agricultural commodities.

The agricultural industry is very well placed to supply the rapidly growing demand out of Asia for virtually all food products. This is evidenced in the high level of Chinese investment in recent years, particularly in the growing and production end of the value chain. This will continue to drive investment opportunities.

Wingara’s growth has been driven by a combination of capacity expansion and acquisition which is expected to continue. JCT recently opened a second fodder processing and storage facility, at Raywood near Bendigo, that more than doubled capacity and is progressing to develop a third facility in western Victoria which will entrench the company’s position as the dominant export processor on the east coast. The plan is to expand production nearly six-fold between 2019 and 2022.  The opening of the Raywood facility also enables the company to handle and store a wider variety of products beyond oaten hay. Further opportunities in fodder also lie in geographic diversification such as in WA which would balance out weather and associated supply risk in south eastern Australia.

The company also seeks to position itself at the low end of the cost curve to maintain competitive advantage. The big expansion in scale at JCT will contribute to this but it is also investing in solar energy at both JCT and APCS. APCS, in particular, is a major energy user and any efforts to reduce this cost will have a big impact on margins.

Wingara is positioning itself as a developer and operator of key agricultural infrastructure assets whilst leveraging its export distribution and marketing network throughout Asia.  In addition to its primary exposure to fodder and animal protein, it is eyeing opportunities based on its vast farmer/grower base in Victoria to pursue the provision of logistics, trading, finance and potentially technology services where choke points can be identified.

Revenue increased by 25% in FY 2018 to $11 million with EBITDA (operating profit) increasing by 80% to $1.1 million. The company has projected revenue growth of over 300% to approximately $30 million in FY 2019 with EBITDA jumping in similar scale to approximately $5.0 million. The key factors in driving this growth have been the expansion of capacity at JCT and the acquisition of APCS in April 2018 which will be the main contributor to the quantum leap in in the current year.

The business is capital intensive so the asset base is dominated by plant and equipment. Nonetheless, working capital requirements are significant especially as there is a heavy seasonal bias in the JCT business for restocking inventory. Fodder is acquired in a narrow window between October and March but processed and sold through the year. The effect is that whilst the company generates positive operating cash flows for the year (over $3 million in FY 2018), there is usually a deficit in the December and March quarters.

The company has extensive debt facilities which have been used to fund the acquisition of APCS and the development of JCT’s Raywood facility. As of 30 September 2018, debt stood at $24.5 million which was partially offset by cash reserves of $4.5 million.

Australia is uniquely placed to benefit from the enormous growth in demand for high quality food, especially clean and green, from Asia. But the agricultural sector has always been difficult for investors due to the high weather and growing risk and commodity price volatility.

We like Wingara’s strategy to capitalise on this potential with a diversified portfolio of strategic assets which mitigates the usual agricultural risks. With two successful acquisitions and completion of greenfield development under its belt we see good track record of execution capabilities with forward planning to build out its portfolio.

We like that the company is focussed on the organic growth opportunities of its businesses as evidenced by subsequent ongoing investment. There are clearly many small to medium sized established opportunities who fit the its strategic profile.

We think that Wingara needs to further bulk up, maybe as much as doubling the asset base in the short to medium term, but it will face some challenges in doing so. Balance sheet management, in particular, will need close attention as it grows. Relatively high current debt levels are easily supported by strongly rising cash flows but additional equity may be required to fund the next acquisition.