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‘Farm to fork’ for hungry investors
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Call it the “farm-to-fork” model of investing. If you want to profit from the Asian consumption story, look no further than the region’s food chain. Right now, the fastest-growing local food brands offer some of the best value for investors.
The food chain runs from the farm to the dining table. Companies are getting increasingly involved across every link in this chain. They’re investing in farming and plantations. More still are climbing the value ladder to invest in food processing, catering to rising demand for ready-made food because of urbanization and changing lifestyles and tastes. This is the genesis of local food brands, packaging everything from refined sugar to processed meat. Processed and branded food products, in turn, need distribution infrastructure, such as supermarkets. This progressive value addition across the food chain is a mirror image of Asia’s quest to rise up the economic value ladder.
Our recent study shows that across this vast chain — dominated by over 300 fast-growing food companies, with a total stock-market value of about US$400 billion — those that have established the strongest brands potentially offer today’s investors the best returns. We estimate that returns could range from 18 percent to 50 percent, depending on underlying consumption growth. We arrived at this conclusion by first sorting 333 food companies into four broad sectors, or aisles — farm, midstream, brand and retail — and 20 sub-sectors, or shelves. We then explored these aisles and shelves to unearth hidden value. The power of the brands is evident. The top five companies account for almost half of the total market capitalization of each segment of the value chain.
A few indicators highlight why these brands make a compelling investment case today. The first is the underlying growth story. Asia’s expanding population means more mouths to feed. Rising incomes mean fatter wallets. The shift toward urbanization, nuclear families and faster-paced lifestyles is a recipe for changing dietary habits.
These changes have a multiplier effect on underlying demand for food products, such as palm oil, soybeans, corn and sugar — the key ingredients in animal feed and processed food. Putting all these factors together, we arrived at 15 percent potential annual consumption growth in our markets in Asia, excluding Japan, over the next five years. This anticipated demand growth, which matches the average of the last 12 years, will not just raise food prices, in turn boosting farmers and plantation companies. It will also benefit food companies with the most powerful brands.
The Asian food company universe has outperformed the broader stock market across Asia, excluding Japan, in each of the past five years, irrespective of whether underlying food prices rose or declined. This outperformance has been mainly driven by the food retailers and the big food brands, the latter particularly benefiting from their scale of operations.
In the plantations space, efficient industrialized farming and palm oil’s position as the fastest-growing globally traded agricultural commodity, support a premium for Asian plantation companies’ price-to-earnings multiples against their international peers. Faster-growing plantation companies are particularly attractive, even more so after any broader market corrections.
Buying the farm
The other top performers have been protein companies — those supplying feed, livestock and fish — as wealthier Asians consume more meat products. In the ASEAN region, food companies based in Indonesia and the Philippines have witnessed a surge in domestic demand in recent years. More broadly, emerging-market demand growth — coupled with rising cost pressures, especially on wages — points to higher prices in the longer term. “Buying the farm” remains a good way to capture this price growth.
Investing in premium brands has become even more compelling after the recent drop in their share prices as a result of uncertainty about the outlook for Asia. The declines have led their price multiples against underlying profits to drop below those of their international peers for the first time in 10 years. In the past, parity of their multiples with international peers has been an upward turning point for Asian food stocks. Big Asian food brands, particularly packaged food and drinks companies, are currently trading at an average multiple of 21 times their underlying earnings. This suggests big upside even if they rise to their 12-year average price-earnings multiple of 27. Moreover, the share price declines have triggered mergers and acquisitions activity, which may add legs to a coming rebound in prices.
As markets fret about the impact of the Fed’s tapering on Asia and lingering uncertainties about Europe’s future, it is pertinent to remember that the Asian consumption story is far from over. This is evident from rising wages, continued job creation and solid household balance sheets in key growth markets. Add to that the power of compounding growth, which is substantial but widely underestimated. The “farm-to-fork” space is set to be a major beneficiary of this structural transformation across this region.
Millions of consumers are shifting away from unpackaged and unprocessed farm commodities and developing a taste for processed, packaged and branded food products. Rapid urbanization and the increased wealth of the middle class across Asia are shifting demand from wet market-purchased and home-cooked meals towards processed food supplied by modern supermarket chains and restaurant meals. Fill your shopping baskets with the region’s top food brands — this is likely to be one of the safest and surest ways for investors to profit from Asia’s sustained rise.
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