Cresud's Value Is Anchored In Real, Attractive Assets

| About: Cresud S.A.C.I.F. (CRESY)


  • Mkt Price: $11.30
  • Mkt Cap: $561.1 mio
  • Debt/Assets %: 12.7%
  • Price/Book: 0.35 (adjusted)
  • Fair Value: $32.66
  • Upside Potential: 189%

Cresud is a leading Argentine agricultural company engaged in the production of basic agricultural commodities. It also has a growing presence in Brazilian agriculture through its investment in BrasilAgro (BRCPY.PK). Cresud's activities include crop production, beef cattle raising and milk production. The company focuses on the acquisition, development and exploitation of properties with attractive prospects for agricultural production and/or value appreciation. Properties will be selectively disposed of where such appreciation has been realized. A majority of Cresud’s current market value is composed of the quoted value of its controlling stake in IRSA, Argentina’s leading listed real estate company. Cresud’s shares are listed on NASDAQ and in Buenos Aires.

The value of IRSA is supported in a similar fashion. Almost 40% of its current market value derives from its stakes in Hersha Hospitality Trust (NYSE:HT), a US hospitality REIT, and Banco Hipotecario, a leading Argentine mortgage bank. Incidentally, they also own 49% of New York’s Lipstick Building which they bought in 2008, shortly before the building’s most famous tenant self destructed…yes, Bernie Madoff (with the money..!), soon to be played by Robert De Niro.

My interest in Cresud was sparked when I was seeking out 'investment plays' on the increasing global demand for protein as living standards improve worldwide. To leverage this play, I focused on identifying the most fertile and/or cheap farmland in the world. This is generally accepted to be the Black Earth region of Ukraine and Russia, the Pampas of Argentina, followed by the Canadian Prairies.

I discarded Canada due to its higher relative cost, and lack of investment opportunities. There are some listed grain traders, but the only farmland opportunity I discovered was Sprott Resource Corp (OTCPK:SCPZF),which is currently more of a resources play. I plan to write about Russia and Ukraine at a later date. This led me to Argentina, and then quickly to Cresud as a compelling vehicle to exploit my investment thesis.

CRESY has a tough balance sheet to tackle. It’s denominated in Peso (4.2620 per USD), a currently stable but potentially very unstable currency. It wildly understates many assets which are carried at cost. Additionally, it consolidates IRSA and BrasilAgro thereby including significant Debt and Minority Interests on the B/S. My solution is to drill down to a USD Fair Value on a ‘look-through’ basis. There are a number of components to work through:

Let’s start with Farmland: Cresud owns 474,124 hectares (2.471 acres per hectare), and has 132,000 ha under a long term concession. I assume a conservative $2,500 per hectare ($1,000 per acre, approx.). Fair Value for owned farmland, and apply a 50% discount for concession land. I assume a neutral value/impact for another 65 K ha they lease from third parties. This valuation is well supported by general Argentine land prices and Cresud’s own recent history of farm purchases/sales. Of course, I hardly need to point out that this valuation is wildly lower than average US values of $3-5,500 per acre. More grotesque is a comparison with Ireland where, despite their recent woes, farmland still fetches $12,900 per acre! Therefore, farmland Fair Value amounts to $1,350.3 million.

Next we have the IRSA and BrasilAgro Market Value: Cresud recently increased its stake in IRSA to 63.2%. Based on the current Mkt Cap of ARS 2,690.8 mio, the IRSA stake is worth $399.0 mio. Its 35.75% BrasilAgro stake, based on a current BRL 531.1 mio Mkt Cap, is worth $107.7 mio.

Finally, let's look at Debt: I’m ignoring IRSA & BrasilAgro debt, as it's issued at the subsidiary level and is implied in the market valuations of these companies. I’m also ignoring all other Cresud assets/liabilities (not already discussed) as relatively minor. Cresud's own Debt outstanding is ARS 746.5 mio plus a recent $60 mio Note issuance, giving us Total Debt of $235.1 mio. This implies a look-through Debt/Assets Ratio of 13% and a Price/Book of 0.35, granting us a great Margin of Safety. Note, however, that these Assets are not liquid or realizable in the short term. Therefore, it’s very important to also evaluate the day-to-day financials of the company. I’m pleased to see that Cresud has positive and improving net income and cashflows, plus consistent increases in crop production. This type of review is important for all Price/Book bargain stocks. If you are faced with a negative net income/cashflow situation, you'll need to aggressively discount Fair Value to reflect this.

Now we can step back and consider more qualitative factors. The obvious one is the elephant in the room – pretty much all of Cresud’s assets are in Argentina. Yes, that concerns me, and limits my portfolio allocation. Argentina's booming, but seems to be ultimately heading for disaster again. Nothing new there! Government debt's not a problem this time around, as the prior default rebased debt to a manageable level, but inflation is clearly understated and threatening to get out of control. We see the same thing occurring with some other key ratios/statistics. However, with Cristina Fernandez de Kirchner beginning a new term, we may finally see some improvement in the government’s fiscal and monetary discipline.

Another big problem is the exchange rate. The Peso is clearly being supported by the central bank, draining reserves and making exports less competitive. On the other hand, if they allow a steeper Peso depreciation it will just add fuel to the current economic/inflation boom. Therefore, the macro environment is prospectively poor for our thesis, we risk currency depreciation and the ever present threat of government risk/intervention. I believe this is countered by CRESY's current level of undervaluation.

Looking at Cresud on a 'micro' basis, I'm more encouraged. Its value is anchored in real assets which are attractive locally and globally. These assets have historically proven that they can act as a store of value in the face of inflation, and/or in USD terms. Cresud is also, rather amazingly, 75 years old this year. To exhibit this kind of longevity in a country like Argentina is a testament to the strength and flexibility of the company and its management. Speaking of management, they clearly eat their own cooking with a 38.5% stake owned by Eduardo Elsztain (Chairman) and Alejandro Elsztain (CEO, they are brothers). Other directors/management hold a further 2.2%, while D.E. Shaw holds 8.4%. Incidentally, the Elsztains had a very close and successful relationship with George Soros throughout the 1990s.

Summing up, we have a great agricultural investment thesis, a reassuring Margin of Safety, and a deeply invested Owner-Operator. Finally, based on 49.656 mio ADS outstanding, we can calculate a $32.66 per share Fair Value which presents us with upside potential of 189%.

I would normally build a 5% position in such an attractive opportunity, but feel somewhat limited by Argentina's macro environment in this instance. I recently topped up my CRESY portfolio allocation from 2.2% to 2.6%.

Disclosure: I am long CRESY.

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