With some regret, I’ve just let go of one of the agricultural plays in my portfolio.
I wrote in a recent article about "the increasing global demand for protein as living standards improve around the world." This prompted me to identify farmland as perhaps the purest investment opportunity to exploit this trend. I highlighted the Black Earth region of Ukraine & Russia offers one of the best farmland opportunities.
After extensive research, I identified a selection of agri-business stocks in the region and eventually homed in on a particular stock. However, I already owned Cresud (CRESY), and couldn’t choose between them in terms of risk/reward. Ultimately, I decided on a 4-5% allocation to pure farmland companies, split between the two stocks. But first, let me walk through the stocks I researched. I’ll include US tickers, but if you’re buying I highly recommend you purchase overseas. It’s a little more trouble (you may have to call your broker), and slightly more expensive, but well worth it for the better spreads and liquidity.
The first 3 stocks actually focus on Eastern Europe. In light of their geographic focus, and the higher farmland valuations in this region, I didn’t investigate these further:
- FirstFarms : Romania & Slovakia – Cereals & Dairy
- KTG Agrar : East Germany & Lithuania – Cereals
- Agrowill : Lithuania – Cereals & Dairy
The next 9 are listed on Polish/Russian stock exchanges, and/or have poor English language websites. Creativ was listed in Germany, but I can’t locate their ticker/listing any longer. These stocks are a stretch too far for me at the moment. As standards and transparency improve, I may revisit these stocks:
- Razgulay Group : Russia – Cereals & Sugar
- Agroton (ARPUY.PK): Ukraine – Cereals, Oilseeds & Poultry
- Kernel (KRNLF.PK): Ukraine – Cereals & Oilseeds
- Astarta (ASTAF.PK): Ukraine - Sugar
- Rusgrain : Russia – Cereals, Poultry & Eggs
- KSG Agro : Ukraine – Cereals
- Industrial Milk Co : Ukraine – Dairy & Cereals
- Milkiland : Russia & Ukraine – Dairy
- Creativ Group: Ukraine - Oilseeds
The next 5 are a lot more interesting. Remember, in Russia, land will be in registered ownership, in the process of ownership registration or occasionally will be leased. Steady/improving progress has been made in completing the registration process, so I treat land in this category as owned. Ukraine, however, does not permit foreign ownership, so farmland must be leased. Since most leases are longer-term, with potential options to buy, I generally value leased land at a 50% discount to owned land.
When I evaluate these stocks on a USD Market Cap/hectare basis, I see a range of values from $1,700 to $4,200 per hectare. At those levels, these stocks don’t offer me enough upside from a pure farmland appreciation perspective. In my opinion, they’re better evaluated in terms of their current/potential earnings growth. I’ve drilled down on each company, but ultimately set them aside as I already own a Ukrainian agribusiness on a similar basis. I’ll write about this at a later date. It’s giving me some heartburn these days, but its operational and earnings growth are exceptional:
- Ros Agro : Russia – Sugar & Pork
- AgroGeneration : Ukraine – Cereals
- Continental Farmers Group : Ukraine – Cereals
- Mriya Agro : Ukraine – Cereals & Sugar
- MHP : Ukraine – Poultry
The next 3 are in the same category, but are even purer earnings/growth stories as they don’t own any significant farmland:
- Avangardco (AGVDY.PK): Ukraine – Eggs
- Cherkizovo : Russia – Poultry, Meat Processing & Poultry
- Ukrproduct : Ukraine - Dairy
Now we can finally home in on my Top 6 most undervalued farmland companies. I’ve listed them according to their level of undervaluation:
- Landkom (LKNTF.PK): Ukraine – Oilseeds & Cereals [(0.5) years]
- Alpcot Agro (AZZQF.PK): Russia (92%, half is leased) & Ukraine (8%) – Cereals [0.8 years]
- Black Earth Farming (BLERF.PK): Russia – Cereals [0.7 years]
- Trigon Agri (TRGAF.PK): Russia (2/3) & Ukraine (1/3) – Cereals [2.5 years]
- MCB Agricole : Ukraine – Cereals & Oilseeds [(0.5) years]
- Sintal : Ukraine – Cereals [(1.4) years]
These stocks look a hell of a lot more attractive from a Mkt Cap/hectare perspective, with values ranging from $300 to $900 per hectare. These valuations offer significant potential for appreciation in the medium to longer term. But note the [final figure] listed after each stock above. This highlights how much longer each company’s Cash should last, based on their current Cash burn rate. A negative number indicates that point’s already been passed. For example, Landkom’s Cash should have been exhausted 6 months ago. So I guess they’re now paying for everything with sacks of wheat..?!
Unfortunately, I think this Cash burn metric is now key for these stocks. We’re in dangerous territory…where I’ve wandered too many times. Sometimes Safe takes precedence over Cheap. The problem with many secular trend stocks is not the longer term, it’s the short term! Too often, investors ignore current losses and (larger) Cash outflows. But these can prove lethal. Far too often, investors never get to enjoy the eventual revaluation of such stocks. Instead they’ve already been scared off by a collapsing share price, diluted by new stock, or even wiped out by restructuring/bankruptcy. Early/mid stage exploration or biotech companies often present the same problem. The purpose of value investing is to avoid such wipeouts – achieve this, and returns will take care of themselves!
OK, Landkom: God, what a dreadful stock..! The company’s under-valued in theory, but it’s always been woefully under-capitalized and management ambitions are far in excess of their abilities. MCB Agricole and Sintal are small-cap and slow/sparse with their disclosures, so this narrowed down my selection to Trigon, Black Earth and Alpcot. They all have similar valuations and strategies, so it was difficult to choose. In the end, I preferred the stock with the largest Market Cap and an exclusive Russia focus (as land’s owned in Russia vs. leased in Ukraine): Black Earth Farming. Based on my Fair Value estimate, my Upside Potential was in excess of 150%. I was also encouraged by 25% shareholdings for Vostok Nafta (VNHIF.PK) and Kinnevik (KINNF.PK). Both are well-respected emerging market investors.
So why am I now letting go of Black Earth Farming? As I’ve highlighted above, Black Earth’s down to just 8 months of cash. This is getting far too tight for me. And the recent interims weren’t encouraging either, with the CEO signaling increased costs/capex to enhance yields. The company already has $121 mio of debt, so increasing debt is not a practical (or wise) solution. And in the current market environment, raising fresh funds will be a tall order and likely to whack the share price. Finally, as I’ve mentioned, I already have other Russia/Ukraine/agri exposure. So, reluctantly, and despite its obvious undervaluation, I’ve sold my entire holding in Black Earth Farming.
I did consider switching into Trigon Agri – it clearly stands out with 2.5 years of cash on hand. However, in the current risk-averse climate, and with the wave of financing difficulties to come in the sector, I don’t see Trigon bucking the trend. So, I’ll save my powder here, or re-invest in something with better near-term potential. But I’ll continue to monitor Black Earth farmland stock prices and developments with great interest, and look forward to potentially re-establishing my position!
Disclosure: I am long CRESY.