Why shun tea (agricultural) stocks?

In their otherwise excellent H2 research piece, D&B have advised investors to avoid tea stocks. This in itself is unusual because brokers (stocks salesmen), will rarely advice you not to buy any share, never mind a whole mini-sector. Their advice was based on changing tastes, fx issues and inflated production costs. Is this sound advice?

Investors will normally invest based on their expectations of capital gain (price performance) and income (dividends). Expectations will change depending on their perception of how price drivers are working. These will be earnings growth; cashflow generation; market share; dividend policy; management and company structure and share liquidity to name but a few. The key word is how in control the company is over all these drivers. In the tea and agriculture sector in general;

1. Earnings are impacted by weather, world prices (fx), GoK policy, changing tastes. All these are outside company control and volatile but are also easily discernable. Its thus possible to do speculative plays based on observed weather patterns, global supply of the particular product and so on
2. Market share: For most at the NSE, they are in world market and with the exception of Rea Vipingo have a small market share. So Rea Vipingo comes into play here provide (1) is working well
3. Cashflow generation: This is probably the most volatile part of earnings for agriculture stocks based on (1).
4. Dividend policy: Most at the NSE are foreign-owned thus give generous dividends (dividend yields by Kapchorua Tea and Rea Vipingo are among the highest) as a means of income repatriation. Again this makes them attractive speculative plays as discernable by price movement as they approach FY.
5. Share Liquidity: They are foreign-owned thus all have a small float that in some cases means virtually no trades for months (Limuru Tea 70% owned by Unilever has traded twice in the last year).

Bottomline: Invest for speculative plays and dividends.

Briefs: Athi River showed a strong H1 07 ; BAT half yr was up slightly on prior yr, but also issued a profit warning as Kenya catches up with the rest of the world and starts to ban smoking; Williamson Tea and subsidiary Kapchorua realised improved FY PBT but predicted lower numbers for this year.