Jim Rogers likes agriculture stocks

Although an upbeat publicity-hound, and successful investor, Rogers is a perpetual bear when it comes to the markets. Still, one area he’s always maintained an interest in investing in is agriculture. That’s because we’ve all got to eat, no matter what kind of shape the world is in.

Through good times and bad, food is a necessity and that won’t change. However, in recent years agricultural markets have suffered, particularly during 2020, as supply chains crumbled and lockdowns hampered the food chain. Jim Rogers sees this as a perfect opportunity to snap up cheap shares to hold for the long term.

Anglo-Eastern Plantations share price surges

So how do I use Jim Rogers’ investing advice? I begin by researching agriculture stocks.

One UK agriculture stock I’ve been considering is Anglo-Eastern Plantations (LSE: AEP). After plummeting 45% in the March market crash, the Anglo-Eastern Plantations share price has almost retraced to its January highs. Now riding the November rally, it’s up 16% this month alone.

It released its Q3 trading update last week. The group reported a strong balance sheet, a reduction in debt and net cash balance of $90.2m, up 11% year-on-year. Its production of fresh fruit bunches for the first nine months of the year increased by 6% but total crude palm oil production was slightly down on 2019. The price of crude palm oil has rocketed up 26% due to the effects of Covid-19 on the economy.

Anglo-Eastern Plantations constructed its fourth biogas plant in North Sumatra, but can’t sell excess electricity until the pandemic is brought under control in the region.

While the increasing crude palm oil price looks set to continue, recurring Covid-19 waves may keep demand suppressed. Yet the potential for a widespread vaccine rollout gives rise to hope. Anglo-Eastern Plantations has a price-to-earnings ratio (P/E) of 18 and earnings per share are 31p. 

This stock has short-term risk, but it could have further upside, and I’d consider buying in the next dip.

Cheap share with added income

Carr’s Group is another UK agriculture stock I think might attract Jim Rogers’ interest. It operates internationally and has several divisions. Its offerings include livestock supplementation products, animal feeds and fuels. Besides these, it sells farm machinery, clothing, and pet supplies through its retail locations. It also has an engineering division servicing the defence, pharma, and energy sectors.

Carr’s agricultural division has not been overly affected by the pandemic, and although the low oil price and lockdowns have slightly hampered its engineering arm, I think this will resume with rigour once we bring the pandemic under control. Carr’s P/E is below 9 and its EPS is 13p. It also has a reasonable dividend yield of 4%. I like how diversified it is and would consider adding it to a long-term portfolio.

AEP produces crude palm oil and rubber at 15 plantations in Indonesia and Malaysia, while Strix makes kettle components. Both companies feature on the FTSE All-Share financial index of the London Stock Exchange.

The AEP share price is down 1.5% year to date, but has gained over 28% in the past six months. It has earnings per share of 22p and a 0.5% dividend yield.

Unethical investing

You should be aware that AEP could be considered as damaging to the environment as traditional oil and gas company stocks. Palm oil is the world’s most popular vegetable oil, second only to soya in world production, but its production has caused destruction of the world’s most biodiverse forests through deforestation. This has resulted in a loss of wildlife, including already endangered species.

However, its popularity and multiple uses have seen it weave its way into so many everyday products, you’d be hard pushed to avoid it. It’s cheap to produce, stable in processing, slow to smoke, and has a long shelf life. For these reasons, it’s found in food, margarine, soaps, biodiesel, detergents, cosmetics, ice cream, and animal feed.

Ethical investing aside, this is an established business with over 27 years’ experience in the industry and a £221m market cap. However, it’s up against several external challenges, including political and climate, and with a price-to-earnings ratio (P/E) of 25 I think it’s probably now overvalued.

Anyone for a cup of tea?

The Strix Group product statistics are mind-boggling. Its company management estimates consumers use its safety controls over a billion times per day. With a 38% global share of the market, it’s the world’s number one manufacturer of kettle controls.

Strix share price is up 16% in the past year, but down 5.7% year to date. It has a P/E of 16.9, earnings per share are 11p and forward dividend yield is 4%. It has a market cap of £350m, which makes it a more stable AIM stock than many. It also employs over 800 people.

The coronavirus outbreak could directly affect Strix as its manufacturing operations are located in China. The company released a statement this week saying its production experienced a one-week delay, but two-thirds of the workforce have now resumed work. The other side of the coin is that Strix has witnessed a few customers increase order sizes because of disruption somewhere else in their supply chain.

To date, the Strix Group shows minimal impact from the outbreak, but as the future impact of coronavirus remains relatively unpredictable, it would be a factor to remember if you’re considering investing.

Outlook ahead

These companies both produce products that experience high demand globally, that I don’t think this is likely to change anytime soon. However, they each face risks in their manufacturing chain, particularly from external influences and a global economic slowdown.

If you don’t mind a bit of risk in your portfolio, I think these might make a good choice if buying during a declining market. Of the two, I prefer Strix.

2020 has seen a turbulent start to the markets as a result of both Brexit uncertainty and global political ongoings. I imagine this may well continue throughout the year as the true impact of coronavirus comes to light.

Not heard of it? The company offers discretionary fund management (DFM) and IFA and mortgage support services, and things sound like they’re going well. Funds under management on its DFM platform rose to £4.44bn, from £3.85bn at 31 March — and fund inflows are apparently running at more than £80m per month.

The firm’s IFA services arm, Paradigm Partners, has seen membership rising to 356 firms (from 352 in March), with Paradigm Mortgage Services seeing membership up to 1,143 firms.

Tatton doesn’t have much public history, having only floated on AIM as recently as July 2017, but analysts are already predicting good things.

Attractive valuation

The forward P/E for the end of this year might look a little high at around 21, but forecast rises in earnings per share would drop that to 17 by 2019, and indications of a strongly progressive dividend suggest a 2019 yield of 4.1%.

If that comes off, it will be a cracking start to life on the stock market.

Chief executive and founder Paul Hogarth spoke of “the increasing demand for a low cost DFM service to the mass affluent market place served by the IFA sector“, and that looks to me to be the company’s main attraction — it’s offering a range of closely related services which should feed into and support each other.

Despite the economic uncertainty we currently face (or perhaps even because of it), I reckon Tatton’s services should be in demand from its targeted clientele sector in the coming years.

Cash from rubber

Turning to a wildly different sector, I’m quite taken by the fundamentals exhibited by Anglo-Eastern Plantations (LSE: AEP). The company produces palm oil and rubber from plantations across Indonesia and Malaysia, and both of those commodities are in huge demand — though ethical issues regarding the destruction of rain forest in places like Borneo might put some investors off.

Over the last 12 months, the Anglo-Eastern share price has soared by 85% to 870p, with some of that surely due to impressive interim results. 

Revenue in the half climbed by 70% to $146.9m, with pre-tax profit up 83% to $31.6m and earnings per share (EPS) more than doubling to 46 cents. Total net assets at 30 June stood at $470.6m (approx £357m) — and that’s more than the firm’s market capitalisation of £346m, so the shares are trading at a discount.

Discounted valuation

On the P/E front, the shares are looking attractively valued to me, despite their impressive appreciation over the past year. With EPS expected to grow by 83% this year, we’re looking at a multiple of only 7.2 and a PEG ratio of a mere 0.1 — growth investors usually get excited by anything under 0.7, but we do have to temper this with Anglo-Eastern’s erratic year-on-year earnings.

The business of investing heavily in new plantations and not seeing profit from them until a few years later would account for some lumpiness in earnings, but that really shouldn’t matter to long-term investors.

The company has several biogas plants up and running now which provide electricity that it will sell to the national grid, in Bengkulu, Kalimantan and North Sumatra, and that will add a little to the bottom line.

There could be environmental hurdles ahead, but the shares look good value to me.

Low valuation

Reporting on Tuesday was palm oil and rubber producer Anglo-Eastern Plantations (LSE: AEP). It released a statement to coincide with its AGM. In the first five months of the year, the company’s own production of fresh fruit bunches (FFB) was 19% higher than in the same period of the prior year. FFB bought in was 105% higher when compared to the same period of the previous year, with the production of FFB and external crop purchases higher as the effects of drought and haze on the palm trees subsided.

The company’s new planting for the first part of the year was 809 hectares. New plantings remain behind schedule due to delays in finalising settlement of land compensation. The biogas plant in the Kalimantan mill has been completed. At the present time, the trapped biogas is flared while waiting for the final electrical works to be completed for the power generation.

Looking ahead, Anglo-Eastern Plantations is forecast to increase its earnings by 124% in the current financial year. This puts it on a forward price-to-earnings (P/E) ratio of just 5.5, which suggests that it trades on a wide margin of safety. Certainly, there is scope for its outlook to be downgraded. However, in the long run it could prove to be a worthwhile investment.

Growth potential

Also offering upside potential is fellow palm oil and rubber plantation operator MP Evans (LSE: MPE). Unlike Anglo-Eastern, it trades on a relatively high rating. For example, it has a P/E ratio of 27.4, which suggests that there may be limited upside ahead. After all, within the same sector it is possible to buy much lower-rated alternatives.

However, the P/E ratio does not take into account a company’s growth rate. In the case of MP Evans, it is forecast to report a rise in net profit of 52% in the current year, followed by additional growth of 26% next year. Both of these rates of growth are well ahead of the wider index. This could help to improve investor sentiment over the medium term.

Furthermore, when combined with the company’s P/E ratio, it puts the stock on a price-to-earnings growth (PEG) ratio of only 0.7. This suggests that there could be more upside ahead after the company’s 83% share price rise over the last year. Certainly, the production of any commodity can lead to high volatility and uncertainty in terms of the price received. But with a wide margin of safety, MP Evans seems to be a shrewd long-term investment.