Alpcot Agro, Aqua Bounty Technologies, Black Earth Farming, farmland, Gain on Biological Assets, garbage stocks, Landkom, Market Cap/hectare, Petroneft Resources, Trigon Agri
Continued from here:
Now we can finally home in on my Top 6 most undervalued farmland companies. I’ve listed them according to their level of undervaluation:
Landkom (LKI:LN): Ukraine – Oilseeds & Cereals [(0.5) years]
Alpcot Agro (ALPA:SS): Russia (92%, but half is leased) & Ukraine (8%) – Cereals [0.8 years]
Black Earth Farming (BEFSDB:SS): Russia – Cereals [0.7 years]
Trigon Agri (TAGR:SS): Russia (2/3) & Ukraine (1/3) – Cereals [2.5 years]
MCB Agricole (4GW1:GR): Ukraine – Cereals & Oilseeds [(0.5) years]
Sintal (SNPS:GR): Ukraine – Cereals [(1.4) years]
These stocks certainly look a hell of a lot more attractive from a Mkt Cap/hectare perspective, with values ranging from about $300 to $900 per hectare. These valuations offer significant potential for appreciation in the medium to longer term. But note the [final figure] listed after each stock above. This highlights how much longer each company’s Cash should last, based on their current Cash burn rate. A negative number indicates that point has already been passed… For example, Landkom’s Cash should have been exhausted 6 months ago. I couldn’t confirm the rumour that they’re now paying for everything with sacks of wheat…
Unfortunately, I think this Cash burn metric is now key for these stocks. We’re in dangerous territory, territory I’ve wandered into too many times. Sometimes Safe takes precedence over Cheap. The problem with a lot of secular trend stocks is not the (seductive) longer term – it’s the short term! Too often, investors ignore current P&L losses and (and probably larger) negative cashflows. But these can prove lethal. Far too often, as a result, investors get shaken out by a collapsing share price, diluted by new stock, or even wiped out by restructuring or bankruptcy. In fact, there’s one other Russian ‘agri’ business I haven’t listed above. Its valuation is absurdly low (a $46 Mkt Cap/hectare valuation!) but it’s a real ‘hairy’ stock, it’s only got 2 months of Cash on hand right now, and Losses/Cashflows will remain significantly negative for the foreseeable future. Not worth disclosing here right now, and certainly not an investment candidate – there’s far too many difficulties to navigate before there’s any chance of realizing value. I’m reminded of the story of the 6 foot man who drowned crossing the river with an average depth of 5 foot…
Early/mid stage exploration companies often tell the same story. Petroneft Resources (PTR:LN) is a good example: Unlike many of its peers, PTR has buckets (sorry, barrels!) of Proved & Probable Reserves and is obviously undervalued on this basis. However, its production ramp-up has been slow and beset with problems, and shareholders have suffered a recent 70% price decline. I don’t believe this is about production, that’s simply an engineering issue. The real problem is that the market’s now alarmed that the company will need extra funding to reach a positive cashflow situation. And, boy, I’m constantly amazed how far a stock can fall ahead of a possible share placing! Biotech stocks present the same problem. For example, I’m fascinated with Aqua Bounty Technologies (ABTX:LN) as a play on fish farming. But even if their AquAdvantage Salmon receives final FDA approval, it’s low on Cash and I’m not at all confident existing shareholders will properly reap the benefits…
Incidentally, the classic London placement process is absolutely appalling. Private investors are generally offered no opportunity to purchase shares (in their own bloody company!). And the usual pre-placing decline in the share price just adds insult to injury. Jesus, a broker chats to his institutional chums about a potential placing, and the share price dumps… I thought this type of egregious ‘behaviour’ was defined as insider trading? Can somebody better informed please tell me I am mistaken?
OK, back to Landkom: God, what a garbage stock – a real AIM special! Seems like many investors and commentators piled into this stock simply because it was the only UK listed and domiciled stock offering Black Earth farming exposure. What a terrible example of ‘home bias’. Cash starvation is not a new story with Landkom. Yes, it’s under-valued in theory, but it’s always been woefully under-capitalized and management ambitions are far in excess of their abilities. In their latest interim report, they have the audacity to lead with a ‘Maiden interim profit – on target for full year profit’ headline. They neglect to mention that $1.1 mio Net Income turns out to be a $(6.1) mio Loss when the Gain on Biological Assets is excluded. And Free Cashflow is predictably even worse at $(10.9) mio. No wonder their shares have been hammered down 97% from their highs…
MCB Agricole and Sintal are small-cap and very slow/sparse in their disclosures, so this narrowed my selection down to Trigon, Black Earth and Alpcot. These all have similar valuations and strategies, so it was difficult to choose between them. In the end, I preferred the stock with the largest Market Cap and an exclusive Russia focus (as land is owned in Russia, vs. leased in Ukraine): Black Earth Farming. Based on my Fair Value estimate, my Upside Potential was in excess of 150%. I was also encouraged on seeing Vostok Nafta and Kinnevik on the register. Both are well-respected emerging markets investors, and each has a 25% shareholding.
So why am I now letting go of Black Earth Farming? As I’ve highlighted above, Black Earth is down to just 8 months of Cash. This is getting far too tight for me. And the recent interims were not encouraging either, with the CEO signaling increased costs and capex to enhance yields. The company already has $121 mio of Debt, so increasing Debt is not a practical (or wise) solution. And in the current market environment, raising fresh funds will be a tall order and likely to whack the share price. I suspect the break of SEK 16.50, key support for the past 3 years, flags a fresh move to SEK 12 or lower. Finally, as I’ve mentioned, I already have other Russia/Ukraine/agri exposure. So, reluctantly, and despite its obvious undervaluation, I’ve sold my 1.7% portfolio holding in Black Earth Farming. My SEK 18.10 entry price was reasonably good, so I’ve fortunately (?!) limited my loss to (12)%.
I did consider switching into Trigon Agri, as it clearly stands out with 2.5 years of Cash on hand. However, in this risk-averse climate, and with the wave of financing difficulties to come in the sector, I don’t see TAGR managing to kick the trend. So, I’ll save my powder here, or re-invest in something with better near-term potential. But I’ll continue to monitor Black Earth farmland stock prices and developments with great interest, and look forward to possibly re-establishing a position at some point!
Philip O'Sullivan said:
Landkom to be acquired by Alpcot Agro http://www.rte.ie/news/business/morningrep/download/1221davy.pdf
Finally time to release LKI shareholders from their misery! And quite a different story from LKI management now, vs. the misleading claptrap they wrote in their last report, as I highlighted above. Incompetent arseholes!
So, before doing any value/growth investing, there are 3 initial steps: i) are you actually dealing with a distressed stock?, ii) if yes, ignore absolutely everything management says (you can pay some attention to what they actually do), and iii) ignore the P&L, most of the B/S, and focus almost completely on the Cashflow statement!!
When I saw this, I wondered if this offered a potentially cheap back door into Alpcot Agro. But all these farm stocks still face the cash burn problem I wrote about above…and each of the stocks above have traded sideways, at best, or down since November (inc. LKI, despite some fireworks in the last few days) for precisely this underlying reason. Then I got excited for another minute or two when I saw Alpcot was doing a $20 mio Placing also. But unfortunately most of this will immediately go to clearing LKI liabilities, so Alpcot’s cash cushion is still uncomfortably slim for me.
I predict a lot more Placings (and/or other corporate activity) to come in the sector…
A non-spam question popped up in my spam folder. Oddly enough, it was a comment on one of my Argo posts, but it concerns farmland. I prefer not to approve the comment as it links to an investment firm, but the question was:
What is your view on owning farmland directly, which is now possible for individual investors which is what we have been involved with?’
My opinion?: Buying an asset directly can sometimes be the cheapest option, depending on how public markets are doing. You need to fully factor in your time, follow-on costs, and even opportunity costs – by the time you do this, a direct investment is probably not going to make sense, unless you want to add scale and make it a full time business/career. The best alternative is therefore usually to identify and invest in a listed vehicle, even if it’s not a perfect fit. You (should) get professional/properly incentivized management, cheaper prices and most importantly you get liquidity. I commented about the current cashflow issues of a lot of the farming companies, but I’m sure I’ll be investing again in some of them – meanwhile, I get to bail out of Black Earth by making a 1 minute call to my broker, and the proceeds now allow me to contemplate a listed timber company investment instead at a huge discount…
Buying through an investment broker/firm inevitably turns out to be the most expensive alternative. From what I’ve seen their assets tends to be much more expensive, fees are higher and possibly less transparent, and it’s not at all clear what the true incentive(s) of the firm/broker are. For example, who is selling the asset – is the firm/broker or a related party? Is the broker/firm also compensated by the seller? What incentive has the broker to assist you in exiting the investment in the future? Be prepared to be stuck in an illiquid investment with either no ability to sell or the chance to sell at a distressed price. I haven’;t even touched upon the number of scams out there…
But of course there are plenty of reputable firms out there. The problem is that the genuine/best firms generally will have a 100/250/1,000 K minimum – in fact, the lower the minimum investment size, generally the more expensive and/or risky it will be. But ignoring this, if going through a firm suits your personal preferences and needs, all I suggest is that you do some in-depth due diligence…and then take a deep breath and repeat your due diligence! And set your yourself a long investment horizon!
Farmers should have bulked up many years ago, but that would imply an efficient and economically rational approach… But the numbers just don’t stack up based on recent land prices, esp. for an investment company – not sure they would qualify for some/all of the EU subsidies. CAP is probably the worst thing that ever happened – my mother wasn’t wrong when she used to describe it as ‘genteel social welfare’! And like most long-term social welfare, it has created a culture of complete dependence for farmers. Of course, now, no farmer in Ireland would make a profit if CAP was taken away.
There is so much land in Ireland that from the little I know is being poorly/inefficiently farmed. It seems that for many farming is a subsidized lifestyle choice as opposed to a business. I wonder would we ever see an aggressive investment vehicle buying up and amalgamating farms and running them as a plantation/business. Could it be done outside the CAP I wonder? Probably not.
Philip O'Sullivan said:
Ah, I see that you looked at CFG in your last blog post!
Philip O'Sullivan said:
2 perspectives – (i) Have you looked at the recently floated Continental Farmers Group, which has considerable operations in Poland and the Ukraine?
(ii) PetroNeft’s current weakness also has a lot to do with uncertainty around a major fraccing announcement due next month: http://pdosullivan.wordpress.com/2011/11/24/market-musings-241111/