With the global degradation in soil quality and disruption to fertiliser supply chains, I think this company is in the right place at the right time. I am interested to see how RLF performs over the next couple of years (disclosure: held).
Some quick additional info and general thoughts on RLF that wasn't all in the prospectus (all sourced):
Rapid growth:
RLF have a track record of rapid revenue growth. In the 5-year period preceding COVID the revenues of the business had a 60% CAGR (see source 2, slide 5). Like most, the business then took a hit during COVID. It looks like post-COVID revenues have again begun to rapidly increase. The financials in the prospectus covered up until 30 June 2021. In the second half of the calendar year (not covered by prospectus), revenue was up by more than 45% (see source 1, timestamp 3:35). As detailed in the prospectus, approximately 50% of raised funds from the IPO will be used for sales and marketing which should further support product adoption and revenue growth.
Global food production requires a 70% increase in the next 30 years to feed the world (see source 2, slide 5). At the same time, around 33% of global soils are already moderately to highly degraded. RLF claim their product can also reverse soil degradation (see source 2, slide 5). RLF believe their product can work as a complement and/or substitute to traditional fertilisers. They claim that farmers can reduce their fertiliser inputs by around 20% whilst also still increasing crop yield (average yield increase of 14.6% in the Australian grain sector which is a 5-6x ROI for farmers) (see source 1, timestamp 13:15). Hence, I believe there are reasonable grounds to expect that they will be able to continue to attract customers and grow in the current global climate.
Profitability:
RLF had a 68% gross profit margin across key products in 2021 which they claim is "significantly better" than many of their competitors (see source 1, timestamp 10:10).
Relative valuation:
RLF have provided a valuation comparison of their peer group / competitors (see source 2, slide 28). The listed competitors and their revenue multiples (updated as at 18/04/2022) are presented in the table below. In addition, an equivalent share price for RLF at the same market capitalisation-to-revenue multiple is presented.
Note: all price, revenue, and EBITDA data in this section has been pulled from Yahoo Finance unless otherwise referenced above. Revenue and EBITDA reflect the last available completed reporting period. Conversion rates used: AUD:USD = 0.74, AUD:GBP = 0.57.
| Company | Wide Open Agriculture | Terragen | Plant Health Care | Average |
|---|
| 1 | Exchange | ASX | ASX | LSE |
|
|---|
| 2 | Revenue (A$m) | 4.32 | 3.65 | 8.93 |
|
|---|
| 3 | MarketCap (A$m) | 91.00 | 27.51 | 70.55 |
|
|---|
| 4 | MC/Revenue | 21.1x | 7.5x | 7.9x | 12.2x |
|---|
| 5 | RLF Share Price @ MC/R (FY21 Revenue) | $0.97 | $0.35 | $0.36 | $0.56 |
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| 6 | RLF Share Price @ MC/R (+45% Revenue) | $1.41 | $0.50 | $0.53 | $0.81 |
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Relative valuations don't necessarily dictate where share prices will go. However, when a company conducts an IPO it can be helpful to look for any source of guidance as to where price discovery may settle. It is interesting to observe that the share price of RLF has the potential to increase significantly from the IPO share price of $0.20 to align with listed peers.
It is possible that RLF may have "managed" their EBITDA in the past financial year given they knew they would conduct an IPO. As a result, I wouldn't put too much weight on their comparatively impressive EBITDA number relative to peers. However, for completeness, here is an EBITDA comparison.
| Company | RLF | Wide Open Agriculture | Terragen | Plant Health Care |
|---|
| 1 | EBITDA (A$m) | 0.72 | -7.73 | -6.15 | -3.56 |
|---|
FY21 EBITDA for RLF was sourced from the prospectus.
Additional revenue streams:
RLF have now signed a letter of intent with CBA to generate a revenue stream via carbon credits (
see source 1, timestamp 12:00). I will delay commenting further on this topic since I do not believe their is sufficient information available yet to reasonably predict to what extent this might increase revenues or the demand for their product in future periods. If someone else has a solid grasp of this topic it could be a strong source of alpha.
Final thoughts:
RLF is involved with a rapidly growing market (food production) which is facing significant short-term (fertiliser supply chains) and long-term challenges (soil degradation). Based on their claims, their products are able to directly address some of the major challenges facing food production. In addition, their products provide impressive returns on investment to customers. They have an extensive track record of growth and are about to deploy significant funds into sales and marketing. Relative to listed peers, the IPO also appears to have been priced very reasonably. I anticipate that RLF is a company that could perform strongly over the coming years.
