@F01
Thanks for the additional colour.
The problem I have with this type of business model is that it seems to rely too much on long-term NAV growth, driven primarily by the underlying commodity price, in order to produce a total return that is satisfactory on a risk-adjusted basis.
In other words, I would personally want a long-term IRR of at least 10% pa in order to feel compensated for commodity price volatility, political risk, etc.So, if the "intrinsic" long-term IRR is around 6% pa (which becomes more like 5% pa once the 0.85% pa fixed management fee is factored in), roughly half of the desired total return would have to come from NAV appreciation.
And if that NAV appreciation is primarily a function of something as hard to predict as the weather, then I don’t feel particularly comfortable owning the asset at today’s price. [*]
Of course, NAV can grow as a consequence of new water entitlement purchases as well, but that would require issuing new equity (in a debt-free model, which I do consider appropriate given the nature of the underlying assets), so I prefer thinking on a constant-assets basis.
I hear your argument about the discount to NAV representing a form of protection, but that NAV is reflective of several interim revaluations. On a cost basis, that protection is no longer there, if I am not mistaken.
To conclude, I think I’ll personally pass for now, but thanks for bringing this company to my attention; I’ll keep it on my watch list.
T
[*]: I appreciate how the consensus view on global warming can play a role, in making this business a sellable story. Based on my very limited knowledge, though, it is exceedingly difficult even for scientists to model climate change in a dependable way. So, again, if the intrinsic IRR (before NAV appreciation) is not high enough to make the investment worthwhile by itself, I personally see the climate dependency as a nuisance, rather than as something that adds to the investment appeal.
(20min delay)