Agro-food security is a national security issue in Muslim countries as they are net importers, estimated at $126 billion, and do not control (halal) food supply chain. Agro-food is a consumer non-cyclical asset class that is more stable than the preferred real estate investing with boom/bust cycles.
Halal life-style industry is a $2.3 trillion growth story in growth markets with growth demographics, has cross sell health appeal to non-Muslims, and attractive due to humane treatment of livestock before religious slaughter.
The $685 billion halal agro-food is about inward investing in Muslim countries, unlike present situation with Shariah-compliant investing of equities, commodity Murabaha on LME, realty funds and trophy acquisitions in Europe, etc. Halal agro-food will lead $1.3 trillion Islamic finance into new markets and initiate the convergence with sukuk.
Investors, especially in west, have been looking for the next Brics story, and chatter by investment gurus has been to look at the emerging/frontier markets like Africa and Mena. It’s interesting to note halal agro-foods are present in all of the Brics countries, on both supply side (Brazil and India) and demand (China, India, Russia, South Africa), unlike Islamic finance.
Although, 1.2 billion (out of 1.8) Muslims are non-banked, Islamic finance is a $1.3 trillion industry with billions in revenue and double digit growth (10-25 per cent) on petro-liquidity. It is also a non-Muslim country phenomenon in UK, Ireland, Bermuda, Singapore, and Hong Kong. The halal industry is twice the size of Islamic finance with greater global reach and penetration. It has more certification bodies than Islamic finance institutions, and provides a better pulse of Muslim presence: purchasing power (Tesco stores with halal items) over financing (Islamic bank of Britain needing financial rescue).
The challenge is halal agro-food has not presented its story as an asset class in real estate terms.
Graph A, shows MSCI World Food Products index of agro-food companies and compares to MSCI World and MSCI World Islamic Index, it shows food (companies) as viable asset class. The story appeals to investors as the conversation addresses revenue, return on equity, dividends, capital appreciation, and away from ingredients, stunning, etc.
The graph clearly shows world food product index has better returns than World Islamic and more stable/linear growth than World Index for the time period, addressing investor volatility concerns. Furthermore, Graph B shows the dividend yield of the food index is better than world Islamic and comparable to world index, hence, providing market performance.
In 2011, the SAMI Halal food index was launched, and universe of companies are from the Muslim countries, like Savola, Kuwait Food, Cosumar, PT Indofood, Sime Darby, Pinar Sut MaMulleri, Juhayna Foods, etc. Courtesy: Idealratings.
Challenge and opportunity
For halal agro-food to become a robust asset class, challenges to overcome include:
1. Halal agro-food companies are fragmented and dispersed globally, hence, an opportunity to strategic consolidation at product and/or geography level.
2. Small free float and illiquidity as many of the food companies are small/medium sized OIC listed companies, hence, challenges for launching equity fund. But, these companies are ripe for stock market investors, as easier sell to ‘man on street’ because they are already consumer investors of company products.
Many of the halal food companies fail the Shariah debt financial screen, de-coupled to Islamic finance, hence, opportunity for companies to issue asset backed sukuk to refinance conventional debt, i.e., convergence with Islamic finance for investing and financing. In increasing the market capitalisation of halal agro-food companies in OIC, it should encourage foreign investing, intra-OIC investing and inward investing.
3. The larger and more profitable halal companies are privately held or halal divisions of MNC food companies, like JBS, hence, private equity approach. These companies are non-Muslim owned/operated and supplying about 80-85 per cent of the halal agro-foods, hence, potential integrity risk issues, where pork DNA has been found in halal food in UK.
4. Private equity looks at north of 16-17 per cent IRRs, and halal agro-foods yield 12-14 per cent, hence, not attractive unless can increase margins by addressing costs and/or achieving scale. Assuming the returns are acceptable, business owners are reluctant to sell as risk averse to additional debt and investors taking out dividends.
In GCC, to address food security challenges, food, agriculture and land bank funds have been launched with varying degrees of success. Like Islamic finance, Muslims need to control and not just contract food supply source.
By: Rushdi Siddiqui
© Gulf Times Newspaper 2019