Ricegrowers Ltd, trading under the SunRice (ASX: SGLLV) brand, has long been a household name in the Riverina region and beyond. But the company’s ambitions are far from regional, as evidenced by its recent guidance and a growing international footprint. The September 2024 update from RaaS Research dives into the company's strategic trajectory, earnings outlook, and what lies ahead for investors in a rapidly shifting global rice market.
Business Model: A Balanced Approach
SunRice operates a unique corporate structure that balances the interests of A-Class grower shareholders and B-Class shareholders, aiming for both acceptable paddy prices and profit growth. The company’s domestic infrastructure can handle around one million tonnes of paddy rice per year. When local harvests fall short, SunRice sources rice globally, taking advantage of favourable pricing conditions in other regions.
At the heart of its growth strategy is a focus on acquisitions and organic expansion within the branded fast-moving consumer goods (FMCG) sector, with recent moves strengthening its position in food products like rice snacks and animal feed.
Strong Earnings and a Bright Future
SunRice has weathered the economic storm over the past few years, showing strong earnings resilience. Its earnings per share (EPS) grew by 32% in FY24, placing it among the top performers in its peer group, according to RaaS. Looking forward, the company's EPS growth is forecast to continue at a more modest 1% in FY25, with the potential to jump by 8% in FY26.
SunRice’s management has set an ambitious revenue target of $3 billion by 2030, implying a compound annual growth rate (CAGR) of 8.2%. This is a significant leap from its FY24 revenue of $1.87 billion. With improved profit margins expected, the goal appears achievable, bolstered by the company’s stable balance sheet and positive outlook for the global rice market.
Valuation Insights
RaaS has revised its valuation for SunRice using a Sum of the Parts (SoTP) approach, which has yielded a valuation of $12.32 per share, down slightly from $12.67. This translates to a market cap of around $797 million, reflecting an upside of 40% from the current share price of $8.78 (as of 27 September 2024).
The drop in valuation is linked to increased EPS growth forecasts from peers like GrainCorp (ASX: GNC) and Bega Cheese (ASX: BGA), which have outpaced SunRice in recent months. Nevertheless, SunRice remains competitively valued against its peers, particularly given its diversified business model spanning international rice, FMCG, and animal feed sectors.
Global Rice Market: Navigating the Choppy Waters
The global rice market is undergoing some turbulence, primarily driven by India’s ban on non-Basmati rice exports, which has disrupted international supply chains. India, the world's largest rice exporter, has left a vacuum that Vietnam, Thailand, and the US have only partially filled. Prices have risen across most grades, with Vietnam's 5% broken rice now at its highest level since 2008.
However, the outlook isn’t all bleak. The USDA predicts record global rice production of 527.3 million tonnes in 2024/25, slightly higher than the previous year. This, combined with rising demand, is expected to stabilise prices over the longer term. Closer to home, SunRice has advised Australian growers to reduce their 2025 crop by 30% to balance supply and demand, which will help sustain rice pool revenues and cover group overheads well into FY27.
Headwinds and Tailwinds
For SunRice, the future is a mix of opportunities and challenges:
- Upside Potential: Stability in water availability, new product innovations, and EPS-accretive acquisitions remain significant drivers of growth. The company is also looking to increase its branded product mix, which now accounts for 70% of total revenue.
- Downside Risks: A return to drought conditions could threaten Australian harvest volumes, and long-term access to water remains a key concern. Price competition, particularly from private-label brands, could also squeeze margins in key markets.
Investment Case
For B-Class shareholders, SunRice presents an interesting case. The company is managing a sweet spot with its Riverina rice harvests and stands to benefit from continued growth in its international and branded divisions. A sustainable dividend yield of 6.5% is forecast, with RaaS noting that the company rarely cuts dividends once set.
Moreover, the company’s steady international expansion, particularly in the UK following the Free Trade Agreement, and potential sourcing opportunities in India, once export bans ease, provide avenues for future growth.
In summary, SunRice’s diversified business model, strong balance sheet, and clear strategic vision make it a compelling long-term play in the FMCG and agriculture sectors. With global rice market conditions stabilising and an achievable revenue target of $3 billion by 2030, investors have reason to feel optimistic. At a significant discount to its ASX peers, SunRice’s 40% upside potential may well attract keen interest in the coming months.
