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Agribusiness reaps benefit of broader macro climate: Media not so much

By Market Index
Tue 31 May 22, 3:12pm (AEST)

Key Points

  • Unwinding central bank policy no longer propping the media sector up
  • AgBiz sector is enjoying unprecedented consumer demand
  • S&P/Agribusiness index launches in July

While the media sector is by some measures looking increasingly out of favour, a new agribusiness index puts a greater spotlight on the specialist stocks within this booming sector.

Media cut to underweight

Having concluded that media is currently at the beginning of the downgrade cycle, Macquarie has shifted its sector stance to negative.

After lowering its ad market assumptions and earnings estimates to capture pending downgrades, the broker has cut the media sector rating to Underweight.

Key concerns highlighted by media companies at the recent 2022 Macquarie Conference, were rising rates & inflation; declining consumer confidence; and ad markets in the next 12-24 months.

While these impact haven’t been felt so far, Macquarie remains cautious on the outlook for ad markets into FY23 given the broader macroeconomic climate.

Declining cyclical indicators

Macquarie analysts believe the unwinding of supportive central bank policy, since initial covid period, will lead to a corresponding decline in cyclical indicators that have helped to prop the sector up.

"This is consistent with our Macro Strategy team forecasting a 60 per cent probability of a mild recession," the broker noted.

Having taken lessons from the GFC, Macquarie concludes that the media sector multiple tends to decline ahead of earnings revisions, with the market implying a downgrade in the vicinity of 20%.

Top picks

While Macquarie's key picks in the sector are (ASX: CAR), News Corp (ASX: NWS) and oOh!media (ASX: OML), coverage is resumed on Domain (ASX: DHG) and Seven West Media (ASX: SWM) at Neutral , while Seek (ASX: SEK) and REA Group (ASX: REA) fall to Underperform.

Macquarie's outlook for free-to-air television (FTA) show an end to the current advertising growth spurt.

Interestingly, JP Morgan recently noted that industry feedback continues to support the view FTA advertising market inventory remains extremely tight, despite some moderation from the levels seen in late February.


First specialist index in two years

In contrast to the cold shoulder being given to the media sector, investors will as of 1 July be able to track and participate in the ASX’s booming agricultural sector through the newly created S&P/Agribusiness index (AgBiz).

As a specialist index, AgBiz will have a combined market cap of around $30bn, and its 25 constituents include Treasury Wine Estates (ASX: TWE), a2 Milk (ASX: A2M), Nufarm (ASX; NUF), Elders (ASX: ELD), Bega Cheese (ASX: BEG), Tassal (ASX: TGR), and Lark Distilling (ASX: LRK).

Commenting on the creation of AgBiz – the first index the ASX has launched since February 2020 - ASX head of strategic delivery, capital markets Ken Chapman believes the index further validates the agriculture sector as a key pillar of the Australian economy.

“We need to raise the profile of this sector given the importance that it has both for Australia, and given the time that we live in,” said Chapman.

Perfect storm

Unbeknown to the ASX when it first conceived the AgBiz index two years, the sector is enjoying unprecedented consumer demand and tight supply due in part to Russia’s invasion of Ukraine.

What’s also adding a leg-up to the agriculture industry’s goal of driving pre-farmgate production to $100bn by 2030 and post-farmgate production to $200bn is the federal government’s Ag2030 plan.

Unsurprisingly, in light of this demand and heightened profile, the sector has outperformed the broader market.

“The combination of accelerating climate risks, booming consumer demand, increasing complexity in geopolitical relations and supply chains, and exponential advances in technology is driving demand for capital in all stages in the value chain,” noted Chapman.


Standout buys

Within a recent notes to clients, high-profile stockbroker Angus Aitken of Aitken Mount Capital Partners named four ASX-listed agribusinesses as standout buys.

These include: Victorian-based olive oil producer, Cobram Estate (ASX: CBO); Provider of animal feed and rendering, Ridley (ASX: RIC) ; Kiland Ltd (ASX: KIL), formerly Kangaroo Island Plantation Timbers; and premium Tasmanian whisky brand, Lark Distilling.

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