One Dining Boom stock you should buy and two to avoid

Branding and product differentiation is the key to finding good agri-stocks.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In a recent article, I highlighted fruit and vegetable supplier Costa Group Holdings Ltd (ASX: CGC) as a potential buy thanks to its market-leading position in a growing industry. Here is another food stock that I think is a buy today as well as two to steer clear of.

Capilano Honey Ltd (ASX: CZZ) is the number one retail supplier for honey in Australia and sells its products through a variety of brands including its namesake as well as Wescobee, Bee Vital, Allowrie and Barnes Naturals.

Capilano has developed relationships with a large network of beekeepers over many years and is the top consumer honey brand in Australia and so it would be very difficult for competitors to challenge its dominance. The company has benefited from rising prices in recent years and this trend shows no signs of reversing given the growing popularity of health foods and restricted Australian honey supply.

For the first half of 2016, company revenue grew 15% to $67.1 million with net profit before tax (NPBT) rising 52% to $7.77 million. The result was driven by export sales which rose by 32% with Asian sales particularly strong, up 53%.

Export sales are still in their infancy and Capilano is focused on increasing production of lucrative premium varieties such as Manuka honey that are highly sought after in Asian markets. To this end the company announced a partnership with New Zealand-based Comvita in March to form an apiary business with the goal of increasing the supply of Manuka honey.

Capilano looks reasonable value at today's prices given it has a market capitalisation of $201.4 million and is on track to deliver NPBT of more than $15 million for the year.

On the other hand, large-scale cattle farmer Australian Agriculture Company Ltd (ASX: AAC) is one to avoid. Whilst the company's strategy to position itself as the largest Australian supplier of premium Wagyu is a valiant attempt to differentiate its product offering, I feel it is unlikely to be successful.

Demand for premium beef such as Wagyu is on the rise globally but the trouble for Australian Agriculture is that Wagyu cattle can be reared in many parts of the world. Whilst honey is also produced globally, the Manuka tree is native only to New Zealand and South East Australia – highlighting the superiority of Capilano's business.

Although Australian Agriculture Co. achieved an impressive 45% increase in revenue to $489.4 million in 2016, operating earnings before interest, tax, depreciation and amortisation (EBITDA) were just $14.8 million for the period. Given net debt was $354.7 million at the end of March 2016 and cattle farming requires significant ongoing capital expenditure it is likely that underlying earnings were negative for the year.

With a market capitalisation of $1.1 billion, (potentially) negative earnings, a largely commoditised product offering and high debt levels I won't be buying shares in Australian Agriculture anytime soon.

Cheese manufacturer Bega Cheese Ltd (ASX: BGA) is another company of questionable quality. Like Australian Agriculture Co. it suffers from weak margins, indicating that customers are unprepared to pay up for its products. Whilst Capilano generated gross margins of 42% in 2015, Bega managed a paltry 12.1% over the same period.

In February, the company announced that Coles had elected to change suppliers for its "own brand" cheese, a contract held by Bega since 2012. The market release painted the news in a positive light indicating that the company would be able to redirect the milk supply to other higher value products and free up $60 million of working capital.

That may well be the case but the thing that concerns me most about Bega is its apparent inability to generate cash. Although a relatively mature business, the company has delivered total free cash outflows, defined as operating cash flows less payments for property plant and equipment, of $32.2 million in the past 2-1/2 years. Despite this, Bega has a market capitalisation of $874.4 million.

Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »