SLC Agricola Reaping Booming Commodity Markets And Advancing Its Value-Creation Strategy
Summary
- SLC Agricola continues to advance a high-return asset-light model predicated on generating above-average yields from Brazilian farmland.
- The Terra Santa deal expands planted acreage by 30% at very attractive prices, with little expected erosion in average yields.
- Although SLC Agricola has shown it can generate good returns across cycles, the shares will often trade more on near-term commodity prices.
- SLC Agricola should be able to generate double-digit annualized returns from here, but the current high price environment is a risk to consider as the shares are vulnerable to short-term commodity moves.
I’ve written many times of my admiration for SLC Agricola (OTCPK:SLCJY), as management has shown great aptitude in generating above-average returns from Brazilian farmland, while simultaneously looking to maximize the value of its land bank and shift toward a more asset-light strategy by monetizing owned acres at attractive prices and expanding its leased acreage for planting.
When I last wrote about SLC Agricola, I thought the valuation was “more interesting”. At the time, corn was trading at around $3.65/bu, soy at $10.03/bu, and cotton at $0.66/lb. Now those commodities are trading at around $5.60/bu, $14/bu, and cotton at $0.78/lb, so you can probably imagine what has happened to SLC Agricola’s share price since then (up ADRs are up close to 65%).
Not only does SLC Agricola continue to see strong yields from its farmland that are typically above the averages for Brazil, management is locking in attractive prices for the ’21 and ’22 crops through hedging. Management also executed on a very attractive transaction that will significantly expand the company’s leased acreage at good prices.
I don’t believe today’s crop prices are new normals, but I do believe that SLC Agricola’s hedging program will secure at least two more strong years of EBITDA (weather permitting), and I believe the asset-light model and above-average yields will continue to drive good long-term results … albeit not at 2020-2022 levels. I do still see worthwhile potential in the shares on a long-term basis, but investors need to appreciate that in the short term the share price is often heavily influenced by commodity prices (cotton and soy in particular).
Adding Terra Santa Advances The Asset-Light Strategy
Management has made no secret of its intentions to increase planted acreage on leased farmland over time. While farming is typically not a particularly high-return business (low-to-mid single-digit returns are pretty common), SLC Agricola has leveraged highly-productive land and advanced / intensive farming techniques to drive above-average productivity and generate strong high single-digit to low double-digit returns from its farming operations.
Now the company is taking that strategy forward in a big way.
With the acquisition of the farming assets of Terra Santa and long-term leasing agreements, SLC Agricola is expanding its planted acreage by roughly 30% (150Kha, including second-cropping). The farms that the company is acquiring are located in Mato Grosso, one of the most attractive agricultural areas in Brazil, and Terra Santa’s yields have been pretty similar to SLC Agricola’s in recent years (several of the farms are close to SLC Agricola farms).
This acreage should generate around R$200M/year in EBITDA at normalized prices, suggesting a very attractive IRR for the R$550M in equity and assumed debt that the company had to pay. SLC Agricola was able to get a good price in part due to the fact that Terra Santa was overleveraged, and it’s also important to note that the company is not acquiring the land – it is basically acquiring the current farming assets and long-term leases to the farmland.
Locking In Another Good Year (Or Two)
SLC Agricola posted impressive fourth quarter results in mid-March, with revenue up 34% on strong agricultural revenue growth (up 61%). Cotton lint revenue rose 50% on a 19% increase in commercialized volumes, while soy revenue rose 62% on a 13% volume contraction and corn revenue more than doubled (up 110%) on 8% volume growth. Farming EBITDA more than doubled to just under R$400M, with margin up 11 points to 35.3%.
And the good times aren’t over yet.
Planted acreage is expected to increase 4%, with cotton down 13%, soy down 2.5%, and corn up 34%, as well as 249% growth (about 13Kha acres) in “other”. While the declines in cotton and soy were not in management’s original plans, a lack of rain has forced a change in plans, with some cotton acreage diverted to corn, which has a longer planting window.
Partly mitigating the decreased acreage is ongoing yield growth. Management believes that cotton yields can improve by as much as 9% in 2021 (after a 1% improvement in the first crop in ‘20/’21 and a 6% decline in the second crop), with soy down about 3.5% (up 4% in ‘20/’21) and corn up almost 4% (up 3% in ‘20/’21).
Management is also using strong prices to lock in attractive hedges. The company has locked in 72% of the next cotton crop and 41% of the one beyond that at prices of $0.66/lb and $0.74/lb through early March, as well as 57% and 21% of the next two soy crops at $10.90/bu and $11/bu, while also locking in about 62% and 40% of corn at $2.78/bu and $3.71/bu.
Those hedged prices may not seem so exciting relative to current spot prices, but forward prices are lower and this is part of the strategy. SLC Agricola will use hedging to secure targeted margins/returns and then leave some exposure “at risk”, though I would expect the company to lock in more of the crop years at attractive prices.
The Outlook
While SLC Agricola management has demonstrated that they can generate above-average returns from operations, the shares will often trade in response to short-term commodity price moves (cotton and soy in particular). That certainly makes sense to a point, as crop prices do ultimately determine SLC Agircola’s revenues and profits, but it’s something to remember if and when the shares sell off again in the future on weaker commodity prices.
Forecasting future crop prices is a thankless task, and I typically use whatever the commodity markets are telling me as at least the starting point. For instance, while the current futures markets are indicating price declines from here (May ’21 is at $14.02/bu, while May’22 is at $12.29 and May ’23 is at $11.35), I’ll often modify those numbers a bit more toward the long-term trend, as the markets often correct more aggressively than the futures reflect. It’s not a perfect methodology, but it has served me well enough over the years.
Between my pricing expectations, management’s guidance on planting/hedging, and the Terra Santa deal, I do believe that double-digit revenue growth is possible again for 2021, and I expect a bigger jump in ’22 as the full benefit of Terra Santa is seen. Longer term, I think mid-single-digit revenue growth is still a reasonable expectation, with long-term FCF margins averaging out in high single-digits and driving mid-single-digit FCF growth.
Including the value of the land bank, that supports a double-digit annualized return from today’s price. The shares also appear to offer a double-digit (mid-teens) near-term return on the basis of EV/EBITDA using a 7.5x multiple and an adjustment for the land bank. I’ve boosted the multiple by 0.5x to reflect lower interest rates and faster advancement of the asset-light model.
The Bottom Line
I do see attractive return potential from SLC Agricola shares. I’ll reiterate my warning, though, that these shares can be quite sensitive to commodity prices, and a downturn in cotton, soy, and corn prices would likely hit the shares in the short term, even if the long-term value creation story is still intact. That sort of downturn would be an attractive opportunity to buy the dip, though today’s price does still have appeal for long-term shareholders willing and able to hold through the vagaries of commodity cycles.
This article was written by
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