If I were a prophet, a seer or somehow otherwise blessed with perfect foresight, I would have added JB Hi-Fi Ltd (ASX: JBH, OTC: JBHIF) to the Aggressive Holdings last summer rather than merely mention it as one of the members of the How They Rate coverage universe that were just looking in from the outside at the AE Portfolio, one of several Others Receiving Votes, as we headlined the August 2012 In Focus feature.

When we published that article JB Hi-Fi, which sells CDs, DVDs, Blu-ray discs, video games and consumer electronics through its branded stores, was trading above our prevailing buy-under target of USD9.75, having closed at AUD9.75 on the Australian Securities Exchange (ASX) on Aug. 17, 2012, equal to USD10.15 based on the then-current Australian dollar-US dollar exchange rate.

JB had also just declared a final dividend for fiscal 2012 that was 44.8 percent lower than the one it paid for fiscal 2011. At the same time, however, financial and operating results were solid, and the company maintained its industry-leading cost of doing business (CODB).

And on Feb. 11, 2013, along with fiscal 2013 first-half results that again surprised to the upside, management boosted JB’s interim distribution by a modest but still impressive 2 percent to AUD0.50 per share.

JB began life as a hi-fi equipment specialist, with an emphasis on vinyl. Among the first to recognize the shift to CDs, JB is now fulfilling its legacy of adaptability by integrating a digital presence with its online music streaming outlet JB Hi-Fi NOW.

The company is only just beginning to realize the benefits of its digital transition. Online sales have been strong, rising 40.3 percent in the first half of fiscal 2013, but still represent only about 2 percent of total sales. The popularity of JB Hi-Fi’s sites continues to grow, with unique visitors to its websites increasing 30.9 percent over the previous year to an average of 1 million per week.

JB Hi-Fi NOW continues to grow steadily, and the platform will enable the company to expand further into additional digital content categories and to capture new digital market opportunities.

Another key factor recommending JB is its CODB. At 13.8 percent for the first half of fiscal 2013 JB’s is lower than many of its local and international competitors. Amazon.com Inc’s (NSDQ: AMZN) CODB is 21 percent, while Australian retailers David Jones Ltd (ASX: DJS, ADR: DJNSY) at 29 percent and Myer Holdings Ltd (ASX: MYR, OTC: MYGSF) at 32 percent also pale in comparison.

Last week JB updated its fiscal 2013 guidance forecast: Management now expects sales to be approximately AUD3.3 billion and net profit after tax (NPAT) to be AUD112 million to AUD116 million, a 7 percent to 11 percent increase in NPAT on the prior year.

Previous guidance for the fiscal year was for sales of approximately AUD3.25 billion and NPAT of AUD108 million to AUD112 million. Management attributed the guidance upgrade to “stronger than expected sales” thus far in the second half of fiscal 2013.

Management reported strong sales growth in Australia and New Zealand for the four months ended April 30, 2013, as its emphasis on high-turnover stores with cheap products, in addition to its expanding online presence, is paying off.

Based on the updated guidance forecast as well as JB management’s dividend policy of a payout ratio of 60 percent of NPAT, it’s not unreasonable to expect a dividend increase when the company reports full-year fiscal 2013 results in August.

Overall leverage is more than manageable, with a debt-to-assets ratio of just 18.5 percent. There’s approximately AUD151 million outstanding on a revolving debt facility that matures in March 2014, relatively insignificant in light of JB’s AUD1.71 billion market capitalization.

JB Hi-Fi has generated 79.9 percent total return in US dollar terms since Aug. 17, 2012, including 67.3 percent gain year to date in 2013. In price-only, local terms the stock has run 71.8 percent since August and 61.8 percent in 2013 but still trades at just 15.9 times fiscal 2012 earnings and 14.9 times estimated fiscal 2013 earnings.

The S&P/ASX 200 Index is currently trading at a price-to-earnings ratio of 21.2. The average yield of the equity benchmark’s components is 4.1 percent, better than JB’s current yield of 3.8 percent.

But JB Hi-Fi looks set for a run back to its previous neighborhood above AUD20 on the ASX, where it traded as recently as April 2011. The Reserve Bank of Australia’s recent rate cut should help consumers, as will the fact that the Land Down Under is adding jobs at a better-than-expected pace. JB Hi-Fi is a buy under USD18.

We hesitated on JB back in August. But we did pull the trigger on Amalgamated Holdings Ltd (ASX: AHD) in November 2012, and since we added the cinema, hotel and resort operator to the Aggressive Holdings we’ve been rewarded with a 32.5 percent US dollar total return, versus 19.9 percent for both the S&P/ASX 200 and the S&P 500 over the same timeframe.

The stock is up 27.1 percent in local, price-only terms in 2013, and has posted a total return in US dollar terms of 28.6 percent.

Amalgamated boosted its interim distribution by 7.1 percent in February, and it continues to benefit from solid box office results and its efforts to upgrade its movie theaters. But the stock has been bid up to a price-to-earnings ratio of 22.1. We continue to rate Amalgamated a buy under USD7.50.

Gambling Pays

JB Hi-Fi’s and Amalgamated Holdings’ solid runs are a major factor driving the outperformance of the consumer discretionary sub-sector of the S&P/ASX 200 Index during 2013.

Consumer discretionary stocks as a group have generated a total return in US dollar terms of 22.9 percent through May 3, best among the 10 sub-sectors and outpacing the broader benchmark’s 11 percent total return.

Amalgamated is priced above traditional value levels at present. But there are other solid dividend payers in addition to JB Hi-Fi that are attractive–not just because of price-to-earnings ratios but due as well to solid operating and financial performance.

Tabcorp Holdings Ltd (ASX: TAH, OTC: TABCF), a wagering, gaming and Keno operator with a media unit attached to it, is one of the biggest publicly traded gambling companies in the world. Based in Melbourne, Tabcorp was formed in 1994 from the privatization of the Victorian Totalizator Agency Board (TAB).

The Great Financial Crisis impacted gaming and wagering activity Down Under, and the company’s announcement of a structural separation created additional uncertainty. And always looming is the threat of government in what is a highly regulated segment of the Australian economy.

But after splitting casino and hotel operations from the core gaming, wagering and keno operations Tabcorp has posted solid if unspectacular results. Management has down-shifted its target dividend payout ratio from 70 percent to 80 percent to 50 percent to 60 percent of normalized net profit after tax, but at the same time it’s been able to focus on growing its businesses through investment and to maintain a decent balance sheet.

Management reported a 2.6 percent increase in fiscal 2013 third-quarter revenue to AUD480.3 million, as growth in the three months to March 31, 2013, was broadly in line with the first half of the year. All four of Tabcorp’s businesses reported positive revenue growth.

Tabcorp’s performance is further validation of its strategy of aligning itself to digital delivery and sports betting. Tabcorp’s growth profile is modest, but its numbers have proven it to be a resilient competitor in a mature sector.

Priced to yield 6.2 percent and trading at a price-to-earnings ratio of just 10.35, Tabcorp is now a buy under USD3.35.

Getting Fed

Asia’s demand for food is surging

Population and income growth in the region is driving it–in quantity, quality and product integrity. The value of global food demand is expected to rise by around 35 percent by 2025 from 2007 levels, with most demand coming from Asia. China and India alone could account for almost 60 percent of the global increase.

The size and scale of global food markets will shift as an increasingly affluent region demands higher value food and greater food choice. Consumer food preferences and diets in Asia will change.

Although Asia is home to some of the world’s largest agricultural economies, the projected increase in consumption in the region will require greater food imports–demand is likely to outpace food production over coming decades based on recent global agricultural productivity performance and emerging environmental constraints.

The production of agricultural commodities for non-food use–particularly plant-based biofuels–and non-agricultural uses of land, including urban encroachment, will also constrain the supply response.

Australia’s agriculture and food sector is extraordinarily well-placed to build on its strengths: proximity to markets in Asia, complementary production systems, a robust biosecurity system, a record of innovation and reputation for producing high-quality and safe food products and a skilled workforce.

The United Nations’ Food and Agriculture Organization has estimated that food production must increase by 70 percent by 2050 in order to meet global demands, a claim which is continuing to fuel the increased value of agricultural businesses worldwide.

This is the basic rationale behind Archer-Daniels-Midland Co’s (NYSE: ADM) AUD3 billion deal to acquire AE Portfolio Aggressive Holding GrainCorp Ltd (ASX: GNC, OTC: GRCLF).

GrainCorp management recently accepted a new, higher offer from the US-based global agribusiness giant. ADM will pay AUD12.20 per share in cash as well as a one-time AUD1 per share special dividend before the deal closes. The deal has an enterprise value of AUD3.4 billion, including debt.

Australian farmers have greater opportunities to take advantage of soaring Asian demand by expanding farm land and boosting productivity. And GrainCorp will expand ADM’s global footprint and give it an important foothold in the rapidly-growing Asian market.

Upon completion of the takeover GrainCorp will become the second of our original eight Holdings to depart the Portfolio, following New Hope. GrainCorp, through May 9, has generated a total return in US dollar terms since Sept. 26, 2011, of 118.6 percent. Hold GrainCorp through payment of the AUD1 per share special dividend.

Another Australia-based food-focused company poised to benefit from maturing Asian appetites is breads, spreads and dairy product manufacturer and marketer Goodman Fielder Ltd (ASX: GFF, OTC: GDFLF, ADR: GDFLY), which could also figure as a takeover target for larger entities in the wake of the ADM-GrainCorp deal.

Goodman Fielder, the biggest food company in Australia and New Zealand, reported that fiscal 2013 first-half net profit after tax rose to AUD51 million in the six months ended Dec. 31, from AUD21.5 million a year earlier. Sales, however, declined 9 percent to AUD1.17 billion due to competition from in-house baking and grocery brands.

Normalized EBITDA in the baking division fell 11 percent to AUD38.4 million in the first half, as sales fell 2 percent to AUD480.6 million. The baking sector “remains challenging from the continued impact of private label pricing and in-store baking on proprietary brands, in addition to the pressure of rising input costs.”

Grocery earnings fell 18 percent to AUD36.8 million, with “increased competition from proprietary brands and private label putting pressure on volumes and price.”

Asia Pacific was a bright spot, with EBITDA up 3 percent to AUD34.5 million and margin improvement to 20.2 percent from 19.5 percent.

The company is part-way through its “Project Renaissance,” the goal of which is annual savings of AUD100 million by 2015. Goodman Fielder recently sold its Integro fats and oils division–to GrainCorp–and its New Zealand-based milling business.

Goodman Fielder is also cutting products. Management aims to trim its 447 stock-keeping units (SKU) in Australia and 269 SKUs in New Zealand by 30 percent.

Management forecast an earnings “improvement” in the second half of the year, as it benefits from price increases in the first half and cost controls but didn’t provide a specific target.

The company plans to resume dividend payments in the second half, “subject to trading conditions,” at a rate of 50 percent to 80 percent of net profit after tax. Net debt was AUD498 million at Dec. 31, 2013, down 35 percent from a year earlier.

Goodman Fielder’s share price has rallied well off a July 23, 2012, near-term low of AUD0.47 on the ASX, which was plumbed during the selloff that followed management’s “omission” of an interim dividend for fiscal 2012. It’s posted a 60 percent gain since then, 20 percent in 2013.

But Goodman Fielder is still reasonably valued at 16.1 time earnings. Goodman Fielder is a speculative buy–ahead of the reinstatement of a dividend, on the possibility that a bigger global agribusiness fish will come along to gobble it up–under USD0.75.

Another aggressive play on the Asian food-demand story is stock-feed manufacturer Ridley Corp Ltd (ASX: RIC, OTC: RIDYF). Ridley’s hasn’t experienced a rally the likes of which Goodman Fielder’s share price has enjoyed.

California-based private equity firm AGR Partners recently acquired a 19.5 percent stake in Ridley for AUD54 million, or approximately AUD0.90 per share.

Ridley CEO John Murray, in an interview with The Australian following the transaction, said that representatives from AGR had visited Ridley over the past year and were one of a number of groups that had expressed interest in investing in the company.

Mr. Murray noted as well that investors from outside Australia are increasingly focused on opportunities from a growing and increasingly wealthy population in Asia, North Africa, the Middle East and South America.

On its website AGR Partners says it is a private equity firm that cultivates profitable, long-term growth in companies it sees as having indispensable assets in the food chain. It makes minority investments in companies in the agriculture and food value chain and facilitates late-stage growth, strategic acquisitions and ownership transitions.

“AGR understands that agribusiness is a vital but cyclical industry whose rewards are rooted in patience, dedication, and expertise,” the website says.

In February Ridley sold its Cheetham Salt business to CK Life Sciences for AUD150 million and is considering a special dividend after using some of the proceeds to pay down debt. Ridley “omitted” its fiscal 2013 interim dividend.