Following the mining boom, we now have the so-called "dining boom" – the result of surging demand for high-quality Australian produce from Asia's growing middle class.
The latest bandwagon appears to be leaving and everyone is scrambling to get onboard.
In the news today, a Chinese manufacturing company snapped up 700,000 acres of farmland in Northern Australia, whilst electrical retailer Harvey Norman Holdings Limited (ASX: HVN) announced an unexpected investment in the farming sector.
Is this a case of "diworsification" by leaving your circle of competence? I would have to say so and shareholders of Harvey Norman might be thinking the same thing.
Don't get me wrong, I am confident in the long-term outlook for Australian produce and agriculture, however, the crowd may be getting too far in front of itself and have unrealistic future expectations about some companies simply because they operate in the sector.
Having grown up on a farm, I know this industry is a cyclical long-term business venture subject to many risks including the temper of Mother Nature. Generally, it's a low margin business with minimal competitive advantages – not what we look for in a market-beating investment.
Freedom Foods Group Ltd (ASX: FNP) is a prime example. Last month the share price hit a high around $3.50 and was trading on a price to earnings multiple around 40. Freedom then announced its full year results two days ago:- a modest 4% increase in revenue, whilst profit before tax plunged 70%.
As many management teams like to do, "underlying operating EBITDA" was highlighted and was roughly in line with the previous year once you exclude numerous "one-off costs" such as marketing costs (which I personally would consider part of normal operating expenses). The share price is now trading around $3 which still appears overpriced to me.
The produce and agriculture sector has a lot of potential in the future, but you must research and understand the company, industry and associated risks before jumping in.
Blindly investing in a company because it happens to operate in a growing (but extremely risky) industry is the quickest way to the poorhouse.
