Ricegrowers Limited (SunRice) - Right Place, Rice Time

678 Views20 Dec 2022 08:00

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SUMMARY

Ricegrowers Limited (ASX:SGLLV) trades as SunRice, the company’s main brand. SunRice is a global fast-moving consumer goods (FMCG) business and one of Australia’s largest branded food exporters with more than 30 brands across 50 countries. We see favourable conditions for at least the next two years as the group manages a ‘sweet spot’ for Australian rice harvests in a world of dwindling supply, with organic growth, acquisition growth/synergies and cost recovery. The company has established a strong base in key divisions from which to expand with progressively larger acquisitions, not dissimilar to the likes of Bega Cheese (ASX:BGA). Despite significant freight and labour cost pressures, SunRice delivered H1 FY23 underlying EBITDA growth of 13% (to $41m), a testament to brand strength and diversification. We expect an acceleration in growth over the seasonally stronger H2 FY23, and into FY24 on the back of cost recovery. Using a Sum of The Parts (SoTP), that is applying selected peer multiples to RaaS FY23 adjusted divisional EBITDA forecasts, we derive a valuation of $8.74/share, 30% above the current share price.

Business model

SunRice has a unique and complementary corporate structure balancing grower (A-Class shareholders) requirements for a rice crop that delivers them an acceptable Paddy Price, with the profit/dividend requirements of B-Class shareholders (including coverage of group overheads) delivered by the ‘Profit Businesses’ of International Rice, Corporate, Riviana Foods, Rice Food and CopRice. SunRice has domestic infrastructure to handle ~1m Paddy Tonnes across two Australian harvests, and multi-region/multi origin sourcing to supplement harvests while taking advantage of opportunities globally. Growth is focused on acquisitions and organic growth in the branded FMCG space.

Consistent dividend profile offsets any short-term volatility

Despite a number of extreme volume and profit swings divisionally over the past few years, including the ‘perfect storm’ in several divisions, SGLLV has maintained dividends to Class-B shareholders of least $0.33/share since FY16 ($0.40/share in FY22). Given this history we have forecast this trend to continue, implying B-Class shareholders can ride out any earnings volatility with confidence and focus on the longer-term opportunities for SGLLV, from both cyclical recovery, organic growth and acquisition. Cyclical recovery centres around improved availability of Riverina rice and cost recovery including freight. Organic growth will be driven by new product development and new international rice markets, while acquisition will centre around building further scale in existing FMCG businesses.

SoTP valuation $8.74/share or $548m mkt cap

Our preferred valuation method for SunRice is Sum of The Parts using adjusted peer EBITDA multiples for FY23f. There are a number of listed peers with consensus data for comparison across the spread of SunRice businesses. We arrive at a SoTP valuation of $8.74/share, with key assumptions centring around the assessed multiples for the two largest divisions, International Rice and Corporate. Our DCF as a sense check is $9.25/share but is somewhat limited given long-term rice harvest visibility, and the resulting impacts on working capital.

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