What is SHV worth?, page-8

Thank you inchiaquin for your thoughtful analysis of the land price dilemma facing SHV. I commend it and the linked Brisbane Times article to all on HC.

Australia has abundant land suitable for almonds at the intersection of good soils, climate and irrigation infrastructure. Almonds are a higher value crop than most alternatives and SHV should have no land access problems.

But it does. The problem is land prices.

CEO Paul Thompson says SHV was acquiring established orchards for $15,000 a hectare and now Schroder Avdeq are seeking $300m for 12,000 hectares of Olam orchards, or $25,000 a hectare WITHOUT water rights.

A seven year old almond orchard produces ~1.2 tonnes per hectare. At $8000 a tonne, this yields $9600 a hectare. As a simple fraction of land costs, this seems a reasonable return. But this overlooks the substantial costs of establishing almond orchards - sunk costs of terraforming, tree stocks, irrigation infrastructure and the discount in waiting long years for tress to mature.

SHV helpfully includes a chart ‘Age Profile of SHV Almond Orchard Portfolio’ in slide sets. It graphically shows the struggle SHV has in extending the area under cultivation - despite it’s advanced skills in land acquisition, permitting, marrying up water rights, planting, irrigating, fertilising and on. SHV has the physical and financial capacity to plant out substantial areas each year and really grow this business. Yet if land prices are too high, to do so simply enriches vendors.

This dilemma confronts all tree crop businesses equally.

Inchiquin points out the breakup value of SHV in terms of land values and water rights is substantially above the $4 a share I nominate as my desired entry. He is right, while no-one wants to do this as we pursue the vertically integrated almond growing and processing model.

SHV values its water rights intangible at an historic ~$80m. They trade at prices well above this, probably closer to the value of land held. We don’t know and SHV ain’t telling.

The share market values SHV on its profits and dividend stream. Its NPV fluctuates with commodity prices, hence the strong interest by HC commentators on Californian almond price trends.

I say, another determinant of SHV’s value is land costs that currently stifle growth. These may change as drought bites geared landholders. Further, government may deter foreign holders with stamp duty and land tax surcharges as VIC and NSW have done with residential land - after all, they don’t get a vote making this a free tax source.

SHV was trading as low as 1.20 as recently as 2012 and a high of 13.15 in 2015. Who is to say this cannot happen again.

My discussion is not definitive. Please tell me why I am wrong.

Ash