For professional investors only
First State
Global Agribusiness Fund
Monthly report
August 2015
Market review
Corporate activity remained a common theme in the agribusiness
space. Among the transactions that had a positive impact on the Fund’s
performance this month was the newly formed joint venture between
nitrogen-fertiliser producer CF Industries and CHS, the largest US
farming co-operative. CHS will acquire a stake in CF’s nitrogen subsidiary
for $2.8bn, guaranteeing fertiliser supplies of 1.7Mtpa under an 80-year
supply arrangement. For CF, the deal bolsters its balance sheet by
reducing its debt load ahead its recently announced $8bn purchase of
OCI, while providing supply visibility. The Fund’s overweight position in
CF Industries added value.
In late August, Monsanto made an upsized $47bn offer for Syngenta,
which was again rejected by the Swiss ag-chemicals giant. Monsanto
decided to abandon its bid and restart its buy-back programme in
response. While we believe there is a strong case for a merger, the lack
of engagement by Syngenta and the general weakness in equity
markets has put pressure on Monsanto’s share price. With the company
considering a large capital raise, the decision to walk away appears
to be a sensible one. We see a strong valuation and growth case in
Monsanto at current levels, and have been taking advantage of the
recent share pullback to increase the Fund’s exposure to this name.
Mitsubishi purchased a 20% stake for $1.1bn in Singapore-listed
agri‑trader Olam International. The Fund does not hold Olam given our
concerns over its ability to generate sustainably positive free cash flow
to equity shareholders, while achieving acceptable returns on capital
employed. Olam suggested that the sale proceeds may be used for
further acquisitions, validating our concerns.
Fund activity
The Fund underperformed its benchmark in August. Russian-based
potash fertiliser producer Uralkali’s share price benefited from the
announcement of a new, $1.32bn debt-funded buy-back as well as the
depreciation in the Russian Ruble, which provides significant margin
leverage to their potash exports. The Fund has a zero exposure to
Uralkali as the buy-back is likely to (i) reduce liquidity; (ii) lead to further
credit rating downgrades on higher debt levels; (iii) raise more corporate
governance concerns; and (iv) potentially result in a GDR or MSCI
delisting, all driving a potential sell-off in the stock.
The Fund’s overweight exposure to North American forestry and
timberland companies detracted from relative Fund returns as
the lumber price continued to decline, and the recent Chinese
currency devaluation raised concerns over Chinese economic activity
and underlying demand for imported wood products. The North
American lumber market remained imbalanced, driven by higher
inventories and slower demand from China and US (weather-related
in Q1 15). While lumber producers are now taking downtime, it will
take a while before the market moves back to balance. Meanwhile,
earnings estimates will need to be adjusted lower. We like the mid-term
prospects of the sector and recent capital investments made by the
companies we invest in, such as Interfor, Canfor and West Fraser Timber.
We will continue to monitor the current softness and opportunities to
increase our exposure to these names.
Conversely, our underweight position in agricultural equipment maker
Deere & Co. added value as the company’s share price fell sharply
after providing a more subdued outlook for its agricultural machinery
demand at its Q3 15 earnings results. Deere lowered earnings and
production guidance for both FY15 and FY16. Falling farm income
in North America and reduced credit availability to fund purchases in
Latin America and Eastern Europe should continue to impact farmers’
willingness to invest in more discretionary items such as agricultural
equipment. This has been our main concern about Deere, while its
earnings visibility remains challenged.
Irish packaging company, Smurfit Kappa, continued to be a strong
performer, following a strong Q2 15 earnings release at the end of
July. The company announced plans to raise its containerboard price
by €40/t across Europe effective September 1. This follows similar
increases announced by Mondi (overweight position in the Fund) due
to recovering paper prices and continued strong demand.
The Fund’s overweight exposure to Food Processing companies was
increased. We initiated a position in Beston Global Food Company,
participating in the company’s A$100m Initial Public Offering (IPO).
We like Beston’s investment thesis. Its principal assets are a portfolio of
interests in seafood, dairy, and meat processing businesses in Southern
Australia; as well as marketing platforms in Asia. It aims to establish a
vertically integrated food supplier, marketing branded export products.
The company will be operated by Beston Pacific Asset Management,
creating alignment of interests. In our view, Beston’s portfolio of assets
has the potential to generate economies of scale, enhance pricing
power and margins.
KapStone Paper and Packaging was added to the Fund during August.
This followed recent share price weakness, providing an attractive
valuation entry point for a US kraftliner player with unique growth
optionality. We like the company’s earnings growth upside potential;
Longview plant expansion optionality; reasonable mid-to-long term
valuation; synergy benefits from recent deals (e.g. Victory Packaging
acquisition); de-leveraging focus; and strategic appeal to every North
American packaging player. While a stronger US dollar provides a
headwind to export margins, the current valuation already reflects that.
First State Investments

Market outlook and
fund positioning
The Fund has an overweight position in the Seeds and Crop Protection
sector, owing largely to our overweight positions in Syngenta and
Monsanto. We added to the Fund’s holding in Monsanto given its
attractive valuation amid share price weakness associated with
uncertainty over the Syngenta deal (now removed), and generally
weak sentiment towards agricultural equities.
We have retained our neutral exposure to the Fertiliser sector while
selectively shifting funds from nitrogen names to more attractively
valued companies in potash and phosphate. Names such as Mosaic
and Potash Corporation are supported by strong cash generation,
an attractive dividend yield, and valuations that are at the lower end
of their trading ranges.
An overweight exposure to Food Processing companies has been
retained. We reduced the Fund’s position in Tyson Foods, taking some
profits after a strong run of share price performance. We switched
these sale proceeds into Pilgrim’s Pride, the second-biggest chicken
processor in the US. Despite our view that chicken margins are nearing
a peak, Pilgrim’s operational improvements and capital allocation
should continue to buffer margin compression. This should enable a
more balanced portfolio among bird types, a reduction in exposure
to commodity leg quarters, limited spot price exposure and significant
structural improvements. Current market valuations suggest a return
to the bottom of previous cycles next year, which we do not anticipate
to occur.
We also maintained our overweight position in Latin American beef
producers, Minerva and JBS. The weak Brazilian Real and softening cattle
prices in Brazil provide strong export opportunities for both companies,
which should drive earnings upgrades and valuations higher at a time
when supplies from US and Australian are declining.

The Fund has an underweight exposure to Paper & Packaging

companies, with adjustments made to several positions in August.
While we added to KapStone, we trimmed European exposures such as
UPM-Kymmene and exited Stora Enso, locking-in profits following recent
strong performance.
The Fund’s overweight position in Supply Chain companies was
increased during August. We have added to US-based global
agribusiness company, Bunge. In light of very large grain inventories
being held in on-farm storage and the prospects of another
large crop in 2015/16, in the absence of a severe weather event,
we anticipate very large grain volumes to move through Bunge’s grain
handling, storage and distribution platform in the coming quarters.
This positive backdrop should drive operating rates higher and improve
margins considerably.

Data source: Bloomberg as at 31 August 2015. All returns are in GBP terms unless stated otherwise.

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