It makes sense to update my research on Cresud (CRESY) as last time I posted research on it I specified a price target of 12.50 when it was trading around $6. My target was reached, but I wanted to specify why I still think the market is vastly undervaluing CRESY’s business.
What is becoming increasingly evident is Cresud’s value of its parts is much greater than the value as a whole.
Cresud is an Argentina-based farmland company engaged in the production of beef, crops, oilseed, milk, etc. The company operates in two main businesses: agriculture and real estate. The current market cap of CRESY stands at $557 million.
Let’s delve into the value of CRESY’s ownership interests and cash:
-Cresud owns 57% of Argentinian land company IRSA (IRS) - value of CRESY’s stake - $305 million
IRSA, a real-estate development and acquisition company among other things in Argentina, was a great pickup. In the most recent quarter, IRSA’s income from their rental properties soared 35% year over year. The company has been growing its portfolio of leasable land while maintaining a 91% occupancy rate. The controlling stake in IRSA has proved very accretive to CRESY adding over $28 million in net income in their latest quarter; CRESY would have reported a loss of $15 million without their stake in IRSA.
-Cresud owns roughly 23% of BrasilAgro- value of CRESY’s stake- $67 million
BrasilAgro owns 430k acres of farmland in mainly Brasil devoted to sugar cane, grains, livestock, forestry, etc. The company acquired most of this land at prices much below current market values according to CRESY’s filings. The company plans to increase production by 44% in 2010.
-Cresud owns 57% of IRSA, which owns 63% of Alta Palermo
Alta Palermo operates in the shopping center business. The occupancy rate stands at an impressive 97% in its properties, and the company operates the largest shopping mall in Buenos Aires.
- Cresud owns 57% of IRSA, which owns 10.4% of Hersha, a REIT (HT)
Hersha is a Maryland based REIT that invests in hotels in the Northeastern United States. Like many REITs, HT had a tough 2008 as debt financing concerns took center stage. The company has recently done equity offerings, some refinancing, and sold non-core assets to shore up its balance sheet spurring many analyst upgrades. It should be noted also that IRSA acquired its ownership stake in HT 40% below its current trading price. Nice investment.
-Cresud owns 57% of IRSA- which owns 24% of Banco Hipotecario
Banco Hipotecario - According to Reuters, the bank is the 11th largest bank in Argentina in terms of assets, ranks 7th in terms of consumer financing, and 5th in terms of net worth in local financial system. Their latest quarter the company reported net income of $20 million, almost a 123% jump over last quarter while deposits grew 7.3% over the quarter and 42% year over year. The tier 1 ratios which measures a bank’s strength and ability to absorb losses stood at 24.3% compared to an average of close to 12% for US banks.
-Cash on CRESY balance sheet - $110 million
What does this mean? The value of CRESY’s ownership interests and cash on its balance sheet alone amount to $482 million compared to the current market cap of $557 million. Also it should be noted the ownership interests above are liquid, publicly traded companies so the value is both transparent and easily accessible should CRESY need the money. What about CRESY’s land? You are getting CRESY 1.2 million acres (485,623 hectares) of land for free. In fact, the market is telling you it is worthless. Hardly, I say. CRESY has the land listed at book value worth $112 million or $93 an acre. What does farmland fetch in Argentina? I will get to this below.
I will note though in 2008-2009, Argentina saw the worst drought in the past 70 years, and this had a negative effect on CRESY’s agriculture production and sales business. 2009 was a tough year for crop yields and production, but this doesn’t mean the land and farming business of CRESY are worthless as it brought in $20 million in revenue in the recent quarter even taking into account sales plummeting of 60% and 67% respectively in wheat and soybeans.
CRESY, a 74 year old company, is turning into a modern day Latin American Berkshire Hathaway (BRK.A) as management has increasingly showed the eye for attractive assets at reasonable costs. Because of the massive land that CRESY owns, it is also becoming a nice macro inflation play as hard assets such as land did fantastically well during the commodity bull market and high inflation period in the 70’s. Combine that with a nice 2.5% dividend, 40% owned by insiders in the company and high growth real estate business CRESY is involved with in IRSA, the company’s value is being misunderstood.
What do I think is a fair value? It is hard to put a value on farmland, but let’s take a stab. The book value CRESY is assigning to the land according to their filing is $112 million, or roughly $2 a share. During the booming economic times in the ‘90s for Argentina, farmland was fetching $2000-$5000 per hectare…Let’s assume $1000 per hectare which is lower than estimates I have found and multiply it by CRESY’s number of hectares of 485k. The result is a value of $485 million or $9.7 a share for CRESY’s land. The value of CRESY’s cash on hand and ownership interests in companies mentioned above fetch roughly $12.62 a share currently based on $631 million/50 million shares outstanding. The value of the agriculture business although having its recent hiccups with $80 million in annual revenue can realistically fetch 3 times sales or $5 dollars a share.
Sum of the parts:
Cash: $2 a share
Value of ownership interests: $7.44 a share
Value of Agriculture business: $5 a share
Value of land: $9.70
You are left with what I think is closer to the true value of the company at $24.12 a share compared to CRESY’s current price of $12.16.
Why doesn’t the market see what I see? Good question. One reason is the market rarely likes to value land other than stated book on the balance sheet. In addition, I am not sure the market has gotten its hands around how valuable CRESY’s IRSA stake is to the company. Lastly, the company is followed by very few analysts, and most investors simply do not understand all the parts CRESY owns.
Disclosure: Long CRESY avg cost $9.45ish