Ruralco’s expanding water business is on track to generate about a quarter of the farm services company’s gross profit this financial year as dry seasonal conditions bite harder across much of the farm sector.
Its diversification into water equipment services five years ago, and a beefed up water trading arm, have delivered 29 per cent and 51pc respective gross profit increases in the first six months of 2017-18.
The two divisions, combined with strong rural supplies sales growth, were key contributors to Ruralco’s overall 30pc lift in statutory net profit after tax to $16.1 million in the six months to March 31.
We certainly haven’t yet written off the cropping season for this year
“Water services and rural supplies sales countered the impact of the downturn in other areas, particularly cattle markets,” said managing director, Travis Dillon.
“We certainly haven’t yet written off the cropping season for this year – weather conditions could change pretty quickly – but water equipment sales are likely to strengthen if it the dry start to the year continues.
“I’m pleased to see the benefits of the diversification strategy at play with the company able to cycle the tough trading conditions in live export and declining livestock agency activity as cattle prices continue to soften.”
Live export optimism
A silver lining to the sliding market cloud is the prospect for greater live cattle export activity as cheaper livestock prices stimulate more buying interest, particularly from Vietnam and China.
The live export trade’s tight margins and low consignment activity resulted in a $800,000 loss for Ruralco’s Frontier International Agri shipping business, but Mr Dillon felt the “market squeeze has hit the bottom of the cycle”
Northern cattle prices were now well back on values of two years ago.
Nationally, cattle prices fell about 15pc during the six month period and were expected to dip further, particularly current dry conditions persist.
Despite agency profits being constrained to modest a 2pc lift, Ruralco enjoyed an overall 7pc revenue increase to almost $920m, against the same trading period result last year.
That also represented a 7pc lift in earnings per share to 15.3 cents, which will translate to a nine cents/share dividend next month.
Rural services reported 10pc growth in livestock selling volumes – including cattle numbers up 3pc despite national saleyard throughput falling 5pc – buoyant sheep and wool business and growth in sales of fertiliser (11pc), animal health lines, stock feed (12pc) and fencing supplies (21pc).
Ruralco expects wool markets to consolidate, but flock and herd numbers should expand if the season improves, triggering more rural supplies sales activity.
The company’s selling agency network contributed 34pc or $57.1m to the half-year gross profit result; farm supplies, 41pc ($69.3m), and water 21pc ($34.8m).
Water grows results
“The water business is well on its way to reaching our target of 25pc with a market leading position based on the premise that water is a fundamental farming input,” Mr Dillon said.
“We’re still very much an agricultural business, but we’ve done a lot of work building our water activities and geographic diversity to help protect earnings volatility if seasonal headwinds get tougher.”
Ruralco recently added new irrigation equipment businesses to its ranks at Dubbo in NSW and Lameroo in South Australia, and is building new stores at Maffra in Victoria’s Gippsland and SA’s Barossa Valley.
Mr Dillon said the half-year result reflected continued organic growth in the rural services division, including the company’s Relyon private label crop protection range which grew 56pc to represent 4pc of total rural supplies sales and demonstrated much more potential.
Ruralco also bought the four-branch business Southern Ag Solutions in the NSW Illawarra and established a new joint venture QNT Agencies at Emerald, Queensland.
The company’s financial services division recovered to post a small $30,000 profit as scale in finance and insurance broking activities expanded.
Mr Dillon predicted much stronger total earnings for 2017-18, bouncing back from a $900,000 loss a year ago.
Ruralco’s shareholding in Ausure Consolidated Brokers had grown to 25pc and would foster development of unique farming insurance products.
“We’ve also now got a good partnership with Rabobank to service the big demand in working capital we see within our client base,” he said.
“We’ve done the heavy lifting and got the right finance and insurance structures in place – now it’s all about scaling up.”