Which segments in the agro-industrial complex may be the most attractive for non-core investors?

The agro-industrial complex (AIC) remains one of the most attractive markets, including for new investors. Demand stimulates the value of assets, as well as the prospects for growth in purchasing activity and prices for certain products. Analysts identify several of the most interesting segments of the agricultural sector for investment in the current conditions.

Investment banker Ilya Shumov recalls the expression of the 19th century English politician Earl Amherst: “In the bad old days, there were three easy ways to go broke: the fastest of them was horse racing, the most pleasant was women, and the most reliable was agriculture…” It’s the 21st century, and Earl Amherst’s expression, continues Mr. Shumov, is still relevant: in 2021–2022, cash transactions for the purchase and sale of distressed assets in the agro-industrial complex and food industry accounted for about 20% of the M&A market, and only in 2023 – 5%.

According to Ilya Shumov, for some, agriculture and the food industry are a safe haven for investment, for others it is an opportunity to place excess capital. Someone successfully invests in these sectors and then, as in venture investments, comes out of the deal with several “X’s”, as was the case, for example, with those who sold the crop production business at the peak of the cycle in 2021–2022; and some end up “stuck” for a long time, not knowing who to invest with an unsuccessful investment, he notes.

Most non-core investors, notes Mr. Shumov, consider agriculture and the food industry as an opportunity for diversification.

Such investors, he recalls, were, for example, metallurgists who, after a successful 2020–2021, decided to use excess profits to develop new businesses in the agricultural sector. Thus, Vladimir Lisin’s NLMK decided to develop dairy farming, and the Rusal Group of Companies has been actively engaged in crop production and sugar production for many years, he points out.

Crouched to the ground

According to Ilya Shumov, the agricultural and food industry market has historically always been more of a seller’s market than a buyer’s, which implied high asset prices. But the situation, the expert notes, is changing in different industries. Mr. Shumov believes that today is a good time to invest in crop production, since this industry, in terms of profitability, is “not in the best shape” and there are already opportunities to buy companies at good prices.

As BEFL notes, in 2022, prices for land assets, which included a significant share of high-quality arable land, increased, especially in Central Russia. In 2023, price growth stabilized, and the activity of the land asset market in the first half of 2023 suggests that agricultural land is not losing its position as an attractive investment object, the analysts’ review said. According to Rosreestr data cited by BEFL, as of January 2023, legal entities owned 23.6 million hectares of land, which is 6.2% of the total agricultural land in Russia. In 2012, this area was 9.6 million hectares less, BEFL points out.

Among the notable transactions, Ilya Shumov recalls the purchase of AEON Group of Companies Roman Trotsenko from the bank of non-core assets “Trust” of the Rostagro Group of Companies, which owns 240 thousand hectares of land. At the end of 2023, information appeared that AEON could also buy the crop production assets of A7 Group of Companies in the Orenburg region, but the deal has not taken place at the moment, he points out. The Signet Capital fund previously acquired the Irrico Group of Companies, which owns 30 thousand hectares in the Stavropol Territory, from VTB structures, and later bought out the Komsomolets Group of Companies, which owns a land bank of more than 170 thousand hectares in the Trans-Baikal Territory, the expert adds.

Edible question

Due to the high export potential, according to Ilya Shumov, the fishing industry remains an interesting sector. In this segment, in particular, AFK Sistema, founded by Vladimir Yevtushenkov, is developing, which in 2021 acquired a stake in the Kamchatka enterprise Zarya, which specializes in the extraction and processing of salmon, and a year later bought the Lloyd-Fish company operating in this industry ” As Mr. Shumov points out, other non-core investors are also interested in the fish market. In 2023, he says, a deal was concluded to sell the Vityaz-Avto company, which owns a salmon plant and a sockeye salmon fishing area in Kamchatka; the buyer of the deal is associated with the Agrocomplex im. Tkachev”.

The Association of Manufacturing and Trading Enterprises of the Fish Market noted that enterprises in the fishing industry with their own quotas remain attractive assets. In pollock production, the association says, profitability can be as high as 100%. But, they warn, the fishing business is complicated by natural risks, high demands on management competencies and regulatory changes.

Ilya Shumov points out that meat livestock farming and table egg production are currently showing good profitability on the market. Product prices remain high, while production costs remain relatively low due to low grain prices, he notes. Beef livestock farming and production has investment attractiveness at the moment, which is reflected in the overvaluation of assets, adds Mr. Shumov.

As for egg production, according to forecasts from the Center for Industry Expertise of Rosselkhozbank, in 2021–2025, their per capita consumption in Russia may increase from 308 to 320 eggs per year.

Analysts associated the market prospects with growing demand for healthier and more nutritious food, and in the long term with the production and export of egg processing products.

Average consumer prices for eggs, according to Rosstat, from January to December 2023 increased 1.6 times, to 132.45 rubles. for ten grand. At the end of February 2024, the indicator was adjusted to 129.17 rubles. for ten grand.

Calorie counting

In the food industry, Ilya Shumov believes, investors may see fewer risks than in agriculture, since this sector is less cyclical. In the last two years, the expert notes, many foreign companies from this sector have left the market, but the buyers were rather strategists. An exception is the sale of the bun manufacturer, Bagerstat: the business was bought by Igor Shilov’s structures, but then the asset was resold to Rustem Mirgalimov’s Tavros Group, he points out.

But investors are actively investing in new projects. Thus, the owner of the Novikov Group restaurant holding Arkady Novikov received a stake in a company planning to launch cola-flavored drinks under the Este.Co brand. Controlled by Pavel Tyo, the main owner of the development Capital Group, the structure became a co-owner of 25% of the Ryazan tea-packing factory, which produces “Three Friendly Elephants” tea. And in the United Tea Company, which bought the capacity of the former Unilever factory with the Beseda and Saito brands, at the beginning of the year Stepan Sergeev, who may be the son of the general director of the United Grain Company and ex-deputy head of the Ministry of Agriculture Dmitry Sergeev, received a share.

By early 2024, the consumer optimism index had returned to a high of 107, according to NielsenIQ. Analysts interpret this as a noticeable strengthening of consumer sentiment and explain that the increase in the indicator is associated with the growth of one of the components of the index in the form of willingness to spend and acquire new things. The Association of Retail Trade Companies (including X5 Group, Magnit, Lenta, etc.) noted that market dynamics in comparable prices turned out to be better than forecasts, reflecting growing consumer confidence and revival of demand.

According to NielsenIQ data for 2023, the turnover of the food and fast-moving consumer goods (FMCG) market in offline and online channels grew by 10.3% year-on-year, of which 5.8 percentage points were contributed by real demand.

Analysts recorded an increase in physical sales in 15 out of 20 product groups, uniting more than a hundred categories. In particular, according to NielsenIQ, in 2023, natural sales of soft drinks increased by 13.7%, snacks by 13.5%, pet products by 12.7%, confectionery by 9.7%, and 9.5% – meat and meat products, 6.9% – dairy products.

Anatoly Kostyrev