Investors see land of hope and glory as rural sector recovers

By Peter V O'Brien

Friday 17th March 2000

Share price movements since December for companies with a land usage or rural service base confirmed the longstanding view that the market anticipates events rather than reacting at the time of profit announcements.

There are exceptions to that general rule, the main one being unexpected gains or losses that surprise the market.

On December 10 The National Business Review examined the prices of and prospects for seven companies that either get their income from the proceeds of land usage or service the rural sector.

It was noted there were some substantial price gains in the preceding 12 months as the market reacted to improved weather and a better outlook for the farming community, the latter resulting in share price gains for two of the three listed rural service companies.

Most of the companies were expected to show improved profitability when they reported for the latest period. Results that came to hand in the past few weeks were good, but there was little effect on share prices.

The table shows the latest prices, those ruling at December 31, a more convenient comparison date than early December, the 1999/2000 highs and lows and the percentage change from the low to the latest.

A comparison of the first two columns showed virtually nothing happened between the end of last year and this week, although the companies have reported.

The final column revealed the stocks had handsome overall gains, well above the movement in the NZSE40 capital index.

That seemed to mean the market built the profit figures into share prices well before announcement of the former, a phenomenon not confined to land usage and rural service companies, even in these days of a rage to invest in stocks that have a whiff of connection with the high-flying technology sector and the "new economy."

Rural service companies Williams & Kettle and Wrightson were the best examples of the anticipation phenomenon.

The former's profit for the six months ended January 31 went from $1.07 million to $2.82 million, an increase of 163%, although it included a larger contribution from the now fully owned Fruitfed Supplies.

It followed a 36% profit increase in the first half of the 1999 year when the $1.07 million was compared with $816,000 in the corresponding period of the previous year.

Wrightson's profit of $1.47 million for the six months ended December 31 compared with a $388,000 loss in the first half of last year.

The company's latest report said the "significant turnaround" reflected decisions taken by the board and management to restore profitability, as well as the early stages of a recovery in the country's rural economy after four years of downturn.

Chairman John Palmer said the group was optimistic improved trading conditions would be maintained for the full year.

Management actions to restore profitability were showing results. Directors were expecting a strong result for the full year.

Those strong performances from Williams & Kettle and Wrightson had no effect on the companies' share prices between December and March.

The latest prices showed the stocks declined slightly in the period, giving more strength to the view investors anticipated the results.

The percentage gains in the last column of the table were more evidence that improved trading conditions and profitability were anticipated part-way through 1999.

As usual, counter-cyclical operators and investors for recovery were into the stocks at the right time, leaving latecomers to invest - if they so desired - at prices that so far, have given them little capital appreciation.

We are now seeing reports the sector is still recovering and gives opportunities for more price gains.

Maybe, but the early milkers got the cream and there would have to be solid profit gains before the stocks showed price appreciation similar to those made from the lows of the past 15 months.

Given the cyclical nature of commodity prices and the rural sector's dependence on favourable weather conditions, discounts are traditionally applied to land usage and rural services companies.

There seems no reason to assume that principle will be ignored in the future.

Full-year results for the companies should be well ahead of last year but people should not get carried away.

It is probable the likely improved results for the current six months have already been factored into - at least to some extent - share prices.

The sector's recent share price experience emphasised another principle of optimum equity investment: it is a matter of exquisite timing.

Land-based companies' share prices

Company index (1)	Price 10.3.00	Price 31.12.99	1999/00 high	1999/00 low	% change from 1999/00 low to 10.3.00
Cedenco	95	95	102	70	+35.7
Dairy Brands	27	27	34	19	+42.1
Grocorp	15	20	25	10	+50.0
Reid Farmers	68	63	69	50	+36.0
Tasman Ag	75	80	91	65	+15.4
W & Kettle	205	206	218	150	+36.7
Wrightson	40	43	47	32	+25.0
NZSE 40 cap	2021	2065	2293	1976	+2.28

(1) Rounded

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