The most exciting stock in a hugely exciting market

With Sub-Saharan Africa tipped for impressive growth this year, this cheap agricultural stock is a must-buy. But act fast, says Bengt Saelensminde - the City already has its eye on it.

A few weeks ago, I said that I was onto a stock that I thought looked incredibly exciting. The business had recently raised money by selling shares to the City. And those new shares were issued at a higher price than the stock was trading at in the market a good omen. If the City's willing to pay more for a stock than the market rate, then it's always a very good sign. That's how we recently made money on my biotech tip Vernalis.

But wouldn't you know it, as I've been working through my diligence on this story, the stock has taken off

I'm talking about Agriterra (LON: AGTA) a stock that I've been following for some time. I was hoping you'd be able to pick up this stock at around 2.7p (while the City-boys had paid 3p in the fund-raising). Unfortunately, you'll now have to pay about 3.5p.

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But I definitely think it's still worth buying in. This business operates in what could be a stunning part of the emerging markets agriculture. Revenues were up a remarkable 55% last year alone. And to top it all, it's got a potentially very lucrative oil deal on the backburner.

What's more, the City seems to have taken a very sudden liking to Agriterra. Here's why I think that's happening...

Africa is finally on its way up

This is a really exciting time to invest in Africa. There is the huge abundance of natural resources oil, gas, gold base metals, precious metals and diamonds.

And withChina investing billions to secure these resources, some parts of Africa are undergoing an enormously fast transformation. As Paul Hill pointed out in a recent MoneyWeek article, sub-Saharan Africa is set to grow 5.5% this year.

But all this activity is putting pressure on food supplies. As I'm sure you know, emerging nations playing catch-up to the West quickly start to consume a lot more food. It's not just a growing (and greedy) population, but it's mainly because consumers change their habits and eat more meat. You have to put in a hell of a lot more calories to feed livestock than its meat gives you back.

That's where Agriterra comes in. This stock looks set to benefit from these deep-rooted changes. It's creating an integrated food and agriculture business. I can see at least three great reasons why Agriterra is set for a great run...

Agriterra is enjoying explosive growth in revenues

Agriterra operates in what's known as Africa's frontier lands'. Why frontier? Well, we're talking about countries with limited infrastructure and technological know-how. And this spells opportunity for operators with a bit of nous; people that can work around the technical difficulties of operating in this part of the world can deliver serious returns if you get in at the right time.

AGTA's developed a profitable business model working with subsistence farmers, offering them cold-hard cash for their excess maize production. A lot of which otherwise often goes to waste.

The most exciting stock in a hugely exciting market

Basically, they collect corn/maize overproduction; refine, package and sell the cornmeal. Doesn't sound very exciting does it? But when you look at the numbers, things get a little more interesting.

Revenues increased 55% to around $2m/month - last year alone. This year we're expecting growth to continue. The chart on the right shows how the figures look over the last three years.

In fact the business has been so successful that they're ending up with a load of bye-product (the husks from the maize) left over from the milling process. They've been using this to make animal feed. And selling feed from a waste product is a nice little earner.

But there's an even better idea...

Beefing up production in a big way

To take advantage of growing demand for meat, AGTA decided to go into the livestock farming big time! Business is ratcheting up at a very impressive rate. Based in Mozambique, the herd has grown from 1,200 in 2010 to 2,350 last year. The aim is to expand the herd to around 10,000 head in what they call the medium term'.

Like the grains business, this side of the business sits very well with the local farmers. Local small-holders benefit from AGTA's prize bulls that can be used to impregnate their own cattle. AGTA also provides cattle dips and the like.

By summer this year AGTA should have its first abattoir in place with a capacity to slaughter around 4,000 head per month. A national butcher's chain is set to follow. Their aim is simple: Field to fork', it's what you'd call a vertically integrated business' in City parlance.

As you can see, this company doesn't hang around. There are plans to expand into chicken and goat farming too.

Still doesn't sound exciting enough for you? Well I can guess what you're thinking. Farming is all well and good but what's the City getting so excited about?

What's making the City boys put their hands in their pockets

As I said at the outset, one of the things that got me interested in this stock is the fact that the City has recently taken up stock at a price higher than the market rate.

Clearly somebody sees an opportunity here. So far I've shown you the nuts and bolts of the underlying business.

But there's more. AGTA has recently gone into the cocoa and palm oil business in Sierra Leone. They've won the concession to expand and run a port in Guinea. They're even building a hydro-electric dam! And to top it all, they've got a stake in an oil project that, in the words of the company chairman "... could prove to be very lucrative for the Company's shareholders."

On Friday I want to let you know all about these new areas to the business - it's what could take this business from what may look like a mundane farming business to something altogether more exciting. But before you dive in, there are a couple of risks to consider...

A few risks to consider

Now Agriterra is no stock for widows and orphans. We're talking about a stock operating in frontier' economies that could prove to be far from stable. Not only that, but we've seen that even though these economies have shown resilience in the face of the credit crunch, their stocks have not.

And one look at the stock chart (below) will show you that this business has itself been put through the mill.

577-Agriterra

That is one scary drop!

It's the classic case of a business coming back to the market looking for more cash to finance its operations. Raising cash by printing new shares is usually very bad news for holders it certainly has been in this case. But the company tells us it's now self-financing. We'll see!

But as things stand I think AGTA is worth the risk. The opportunities could be worth it (recent investors certainly think so).

I'll give you a rundown on AGTA's new opportunities on Friday. In the meantime take a look at the company's report and accounts (to May 2011). You can download them here.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

 

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

 

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.