The UN Population Division expects global population to hit 9 billion by 2050. This poses challenges and opportunities at multiple levels.
First, most of the incremental 2 billion are expected to be in developing nations where rates of population growth still outstrip that of developed ones. This implies producing at least 70% more food relative to 2012.
Second, many of the developing countries in the world are growing wealthier with rising incomes. As families earn more, they spend the incremental income on better food with higher nutritional value. The changing diets further multiply the need to increase yields of crops and grains. For example, it takes 5 kgs of grain to produce 1 kg of meat.
This multi-decade secular trend in growing demand for agricultural goods bodes well for the companies which have exposure to growing demand for food across the supply chain – from farm to fork.
Macrovue’s investment team have analysed two top performing companies.
Zoetis Inc. Class A (NYSE: ZTS)
Zoetis delivered strong 2Q FY 2018 results beating consensus estimates for both earnings and revenues. The company also raised its midpoint 2018 EPS (earnings per share) guidance despite slight initial dilution from the Abaxis acquisition (May 2018) and an unfavourable FX impact. Overall, it was companion animal sales (+16% year-on-year) that drove the top-line beat with strong dermatology sales and a recovery in Simparica.
Analysts believe that Zoetis remains well positioned in the attractive animal health industry with an upward bias to estimates based on a combination of a companion animal new product cycle as well as an opportunity to leverage the recently acquired Abaxis diagnostic assets. (Abaxis is a leading global provider of veterinary point-of-care diagnostic instruments).
Zoetis has returned +60.3% (AUD) in the year to 31 August 2018.
China Mengniu Dairy Co. Ltd (HKG: 2319)
China Mengniu management has recently upgraded its full-year sales guidance to mid-teen growth from low-teen growth for full-year 2018. Also, they see margin expansion driven by premiumisation and volume growth which will be underpinned by new channels (ie exclusive collaboration with B2B e-commerce platforms).
Mengniu’s 17% sales growth in 1H18 was driven by 7% volume growth and 10% ASP increase (via trade-up of sales mix and effectively reduced discounting year-on-year). In fact, all categories recorded double-digit growth in 1H18. Management concluded that its 1H18 growth was of "high-quality" (with further sales mix trade-up, turnaround of Yashili, almost breakeven of CMD and further enhanced branding/pricing power).
Management emphasised that it will not copy competitors’ strategies (ie Yili) like increased promotions. Despite reduced discounting/promotions year-on-year, sales of basic products expanded 14% year-on-year in 1H18, demonstrating its strong brand equity.
China Mengniu Dairy has returned +37.2% (AUD) in the year to 31 August 2018.
You can invest in these companies directly through Macrovue’s Feed the World Vue.
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