I noticed this interesting article in the lead up to Christmas,...

I noticed this interesting article in the lead up to Christmas, which reports on a plan by the Costa family, along with some other wealthy investors, to develop an almond project in the Riverina region of NSW.

The extracts below are taken from the above report-

...The Costa family has joined other wealthy families and an institutional investor in piling into a $120 million equity raising to fund the acquisition and development of three irrigation properties in the Riverina region of NSW that will be converted into high-yielding almond orchards.

The acquisitions are part of a new investment vehicle put together by agricultural development firm goFARM, which is jointly owned by managing director Liam Lenaghan and Costa Asset Management, the private investment arm of the Rich List Costa family, who founded fruit and veg giant Costa Group.

The three properties near Griffith include the 700 hectare Stephendale Vineyard at Yenda, where the vines are in the process of being removed to make way for nut plantings. The vineyard, one of the largest in the region, was previously owned by Hong Kong-listed conglomerate CK Life Sciences and, before that, by the once ASX-listed Challenger Wine Trust. goFARM also snapped up the 585ha Greenview farms at Tabbita north of Griffith from the Schembri family, where almonds will also be grown. A third property in the region was acquired primarily for its attached water entitlements.

In total, the acquisitions comprise 1758ha of farmland within the Murrumbidgee Irrigation Area, as well as existing infrastructure (which will be repurposed) and 5000 megalitres of high and general security water entitlements. goFARM raised the $120 million in less than a month, highlighting the strong appetite for high-yielding agricultural investments despite headwinds being felt by the sector from higher interest rates, a drier seasonal outlook, and lower commodity prices...

Of course, the Costa Group - which was named after, and founded by, the aforementioned family- was the subject of a takeover offer earlier this year.

Significantly, this article provides us with some industry-specific numbers to crunch, offering us with the chance to play around with some comparative valuations.

According to the article, they've paid 120 million for 1758 hectares of land, inclusive of the water rights that were acquired along with the properties. From the sound of it, even though they've earmarked the lands for development, there isn't a single almond tree currently grown anywhere on these properties.

So, when you run over the numbers, they've paid $68,259 on a per hectare basis.

How does that compare with Select Harvest?

Well, to keep things simple, I'll just take the current market cap of SHV and divide it into the total number of hectares that the company currently owns.

The market cap at time of writing is $357 million.

According to the Bell Potter Conference presentation, released on the 12/09/23, Select currently controls 9262 hectares of almond orchards, some of which is owned directly, and some of which is leased.

For the sake of simplicity, I'll just focus on the directly owned orchards (the leased orchards are a little more complicated: my understanding has always been that the company owns the trees on this acreage, but not the land).

A total of 5,107 hectares of those orchards are owed directly by Select. A market cap of $357 million implies that each of those individual hectares is currently worth $69,904.

So in other words, at the current market cap, each of our directly owned hectares is worth more-or-less the same of each of the hectares that the Costa Family led consortium are buying up- and this despite the fact that, as far as I can tell, there is not a single almond tree growing anywhere on any of those Riverina properties that they've just snapped up.

Of course, I haven't considered Select's debt into this equation, which is not insignificant in light of the present high-interest rate environment: the company debt-to-equity ratio currently stands at 46%.

Then again, my simplistic dollar-per-hectare calculation above also glosses over many other considerations relative the valuation of the company, not least the medley of other assets that are owned by the company.

Some details of these can be gleaned from the most recent Annual Report ('FY2023 Annual Report' , 24/11/23).

In the financial year ending 2023, for example, the company biological assets were valued at some $70 million dollars: this would presumably cover the value of the trees in all their orchards, both the leased orchards and company-owned ones.

Then you have the plant and equipment, with the Carina West processing facility being the most significant. But there are also a whole lot of other assets that are lumped into the PP&E figure, many of which only get mentioned in passing in the company announcements, if at all.

For example, there is the H2E Biomass power station, which is used to generate electricity, which both reduces power costs and can potentially generate excess electricity to be fed back onto the grid. That is a significant asset.

And there are certainly other assets besides, such as horticultural equipment. The company also controls water assets, of course -although I have lumped these into the company controlled orchard valuation, above- and I'm sure Select still owns the solar farms they set up years ago, even though they don't rate a mention any more.

So although the company debt has to be factored into the equation, the other assets highlighted above would probably be worth at least as much, if not more

In other words, which ever way you cut it, Select Harvests looks cheap, in comparison to what the Costa Family have been willing to pay for those undeveloped almond assets in the Riverina.

If you buy SHV shares today, you are buying each hectare of company controlled orchard for roughly the same price as the Costa family led consortium paid for their Riverina almond land, and this despite the fact that Select's almond orchards are full of mature, producing almond trees, whereas the Costa family and their cashed-up confederates probably haven't even yet got around to planting anything on that vast expanse of land they've just purchased.

Buying fully developed almond orchards for the same price as undeveloped almond acreage sounds like a steal, right?.

But actually, even that is actually somewhat understating things.

The reason I say this is because there is good reason to believe that the land the Costa family are buying up is second-rate.

The Riverina region is problematic for growing tree-crops such as almonds. It is prone to more extreme weather than the other major almond growing zones: it tends to get hotter, rainier and colder than areas further south.

For this reason, Select Harvests ceased planting trees in the Northern Region in 2017.

And Select aren't the only horticultural company who seem to have concluded that the Riverina is a dubious proposition. As Ashentegra noted in a post here back in October, earlier this year, the Ferrero Group pulled the plug on its plan to grow hazelnuts in the region, bulldozing all the trees they had planted and selling the land.

The best almond-growing land in Australia is in the Mallee and the Riverland, and the acreage in this area in tightly held. Of course, one of the tight holders is Select Harvests, with nearly 80% of their almond acreage falling within the Mallee and Riverland regions.

The Costa family and those other investors are really picking over what's left.

In closing, the current company market cap implies that each hectare of Select's mature almond orchards, the lion's share of which, as noted above, is located in prime almond growing regions, is worth roughly the same as each of the hectares of the Riverina land that was recently acquired by the Costa-family led consortium.

This despite the Riverina being a second-rate region for growing almonds, not to mention a distinctive absense of any actual almond trees on the said recently-purchased land.

I suspect that those wealthy families would have ultimately been better-off if they'd just used their money to buy shares in Select Harvests, although the company would probably be far too illiquid for their liking. They certainly wouldn't be able to buy up a large position under the $3 mark, I'd wager.

It goes to show, that on the stockmarket, it is not always advantageous to be a whale.