@BIGSKY9 (Grant) I have been looking for stocks that will provide exposure to Australian Agriculture and have settled on Duxton as a solid candidate. I have been reading through some of your past posts and really appreciate a lot of the research you have already done. Having spent some time looking at the company a number of factors have come to my attention.
1.
Discount to the Gross Asset Value: I take it the gross value of their assets is worth about $2.15 a share but what about the Net Asset Value (NAV) which incorporates the debt. They have about $25m in debt which equates to about $0.57 a share ($25m divided by 43.4m shares). When you account for the debt you are down to an NAV of about $1.62 per share. As much as I like to see companies buy back their own shares, I question the wisdom of this policy given there doesn't appear to be a significant discount to NAV. Am I missing something here?
2.
The Dividend Policy: I was also surprised to see they had paid a dividend. A lot of their earnings aren't generated via cash flow from farming activities but via the re-evaluation of land and water rights which have no cash flow impact (unless you sell). I would think given the unpredictability of the weather they would be better off conserving their capital (at this stage) or perhaps paying down more debt.
3.
The sale of Boorala in South Australia: I believe they recently sold a farm in South Australia and bought more land in close proximity to their existing NSW farms. I imagine one advantage of having a geographically diverse portfolio of farming assets is, when there are adverse weather events in one region, you can still rely on the productivity from the other unaffected regions. Take the flooding events in Forbes NSW this week. This could seriously threaten a large proportion of Duxton's farming activities (hopefully not).
Having said this I really like the fact that these guys have only been listed a few short years and have a very attractive share structure despite the difficult trading conditions. The market capitalisation is still relatively modest and the leverage to higher asset prices should be solid. The CEO also has plenty of skin the game which is a plus. Their gearing levels remain relatively modest which I hope remains the case.
A friend of mine recently brought to my attention an interview which suggests rural land will be an excellent hedge against inflation going forward. So what I am looking for are companies with significant value in their property holdings which have the ability to at least break even or ideally make some modest profits from their farming activities. This later point seems to be the challenge for many farmers in Australia. What I am effectively looking for is a land bank with relatively modest annual outgoings. Note the significant increase in the value of Duxton's properties in 2020/21. This is where I believe the future upside is provided their operational activities don't offset a large proportion of these gains. I also like Rural Funds Group which appear to lease their properties out so they can benefit from the appreciation in value without any of the headaches of running the farms. I imagine this to be a good model. The downside with Rural Funds Group is they are already a 1 billion dollar plus company. I would prefer something smaller.
Anyway this post is already too long. I would appreciate any feedback to the points I have made and look forward to seeing how these guys go in 2021/22. I am certainly following them with great interest.
Thanks Grant.
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