A working capital report for Australian listed companies reveals Agriculture is best

The ninth annual report that measures the working capital performance of 11 companies in the agriculture sector (within a total of 137 ASX listed firms), has revealed how they performed during a turbulent year and what the outlook is in 2022.

Jason Ireland and Sean Wiles, Partners at McGrathNicol Advisory investigated the common characteristics shared by the agricultural companies that are best positioned to navigate the current supply chain pressures and take advantage of opportunities.

The key findings of the research are:

  • Despite challenging conditions, 73% of sampled agricultural companies reported revenue growth, driven by strong demand for Australian grain as weather related crop challenges in the Northern Hemisphere impacted operators in other regions.
  • However, rising labour and transport costs associated with COVID-19 meant that only half achieved EBITDA growth.
  • Average Days Working Capital (DWC) of our sampled companies increased by 3.5 days (to 85.8 days) – the highest of any sampled sector in 2021.
  • This was driven by increased Days Inventory Outstanding (DIO) as a result of increased local crop production and stock backlog caused by closed borders.

Interestingly, of the companies that reported a higher DIO, only 43% also reported an increase in DWC. This was due to approximately two thirds of these companies lengthening their supplier payment cycles and shortening their debtor collection cycles to help manage the increased inventory load.

What does this mean for the rest of 2021 and into 2022?

  • There are huge growth opportunities for Australian businesses in 2022 but this recovery will not be the same as our first emergence from COVID.
  • Compared to other regions, Australian agricultural firms have the highest DWC of any region (as a result of higher inventory) meaning they have more cash tied up in working capital and less available cash to deploy in capex and other areas.
  • However, the conditions look positive for 2022 with the forecast of continued growth in production and demand for Agricultural products underpinned by favourable seasonal conditions, an expected lifting of COVID-19 travel restrictions and higher consumer discretionary spending.