- Alico is the top grower for Tropicana.
- Recent plantings should lead to nice market share growth.
- It trades at just over half the value of its land.
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Alico (NASDAQ:ALCO) is an undervalued citrus grower operating in Florida. At current pricing it has a dividend yield of about 5.5% and a normalized price to earnings ratio of about 17x. This multiple seems opportunistically cheap given the multiple levers of growth over the coming years
- Recent plantings coming online
- Sustaining higher level of orange juice pricing
- Recycling ranch land into more accretive uses of capital
- 3rd party asset management business
Land as an asset class tends to trade at significantly higher multiples due to its low maintenance costs and inflation hedging capabilities. There are not many ways to pick up land these days at this kind of yield so let us dig in.
ALCO has 49K acres of citrus land and 48K acres of ranch land as per the 3/31 10-Q. The company values these acres as follows.
If these valuations are correct, ALCO stock is severely undervalued with a market cap of $263 million. With 7.526 million shares outstanding, the implied price per share is $49.80-$69.20. Even the low end of that range provides quite a bit of upside from today’s $35 price.
Companies of course, present themselves in the best light possible, so I don’t want to just take these numbers at face value. Here are some recent transactions:
In April of 2021, Alico sold 5734 acres of ranch land to the state of Florida for $14.4 million.
Source: SNL Financial
That is a price of $2511 per acre which supports the $2000 to $3000 estimate. Alico’s earnings release reveals a few more sales were made this year:
“In the nine months ended June 30, 2021, the Company recorded gain on sales of real estate, property and equipment and assets held for sale of approximately $33.6 million relating primarily to the sale of approximately 18,500 acres from the Alico Ranch to several third parties”
Those too are in a similar range.
As for the value of citrus land, Alico is trying to increase its acreage so it does not have sales to reference. Instead, we can turn to an industry observer. Citrus Industry News reports:
The citrus report started with a look at Polk, DeSoto, Hardee, Hillsborough, Okeechobee, Manatee, Highlands, Lake, Collier and Hendry counties. Grove sale sizes reported for those counties ranged from 5 to 1,500 net tree acres. The average size of grove sales was 69 net tree acres with a midpoint of 30 acres. Approximately 5,731 gross acres and 4,666 net tree acres were included in 68 selected 2019 sales totaling $48 million. The net tree citrus acres had a price range of $3,532 to $15,464 per acre. The average for these sales was $8,442 per gross acre and $10,369 per net tree acre, with $8,000 per net tree acre as the midpoint.
So the aggregated sales data shows a midpoint per acre of $8000 which is the low end of Alico’s proposed range.
There are 2 aspects that make the $8000-$10000 plausible to me.
- The above data is from 2019, so there are a couple years of appreciation that could be added
- Public companies tend to own assets of above median quality and Alico is no exception with industry leading margins
Sales comps seem to confirm this land valuation indicating ALCO is trading at a substantial discount to the value of its land assets. Discounted valuation alone is of course not enough to justify investment, so what are the pathways for investors to realize the land value?
Well, the most obvious means would be a sale of the company, but I don’t see that as likely. The approach I think Alico is more likely to take is to use the valuable assets to build a growing stream of cashflows.
The aforementioned ranchland sales are at extremely low cap rates as the ranch land generates minimal revenue. Thus, their sale generates significant amounts of dry powder with minimal cost to earnings. As the proceeds get reinvested through other channels the net effect on earnings should be strongly positive.
The first and biggest pathway of reinvestment is citrus plantings.
Since 2018, Alico has ramped up its plantings on both existing citrus land and newly acquired citrus land.
Newly planted trees take a few years to become fruit bearing so the 2018 and 2019 plantings are the ones that are going to hit the revenue stream in the near term.
These plantings are going to increase ALCO’s citrus production in an environment where U.S. production is generally declining with overall output down 12% this year from the 2019-2020 season according to the USDA National Agricultural Statistics Service.
Some of the decline is just a lower yielding crop year but a decent chunk of it is permanently lost supply with Florida citrus acreage being converted to developments.
Citrus Industry reports:
Florida’s citrus acreage declined another 3% in 2021, to 407,348 acres, the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS) reported Sept. 8. That’s the lowest level since the NASS started keeping track of the acreage in 1966.
With ALCO increasing production and overall production declining there are likely to be significant market share gains.
Prices for orange juice have been quite strong with the pandemic causing a significant increase in demand for not-from-concentrate orange juice. With demand high and supply low, prices have been rather high as of late.
Source: Trading Economics
Over time, I would anticipate demand dropping back toward pre-pandemic levels as people return to restaurants rather than eating from home, but so far, the post-pandemic demand has been stickier than expected. Even if the demand drops back to normal it is possible prices will remain at the higher level because of the aforementioned supply decreases.
Producers, including Alico, are battling with a pervasive citrus tree disease called Huanglongbing. I am not a botanist, so please consult scientific journals for a better explanation, but essentially this inhibits a tree’s ability to absorb nutrients causing trees to degrade and the fruits to stay green rather than the orange color we are used to.
As of today there is no cure, but there are treatments in which frequent and expensive tree nourishment can keep the trees healthy enough to bear high quality food grade fruit.
This disease is ubiquitous, affecting just about every citrus tree in Florida as well as hitting other major citrus regions like Brazil. It is also not a new thing, having majorly affected the industry for over a decade.
It is manageable but increases operating costs. Some industry participants have gone out of business which is part of the reason for the supply declines. Others adapted, tightening up their cost structures to maintain margins.
Alico falls into that second category with its cost reduction strategy called Alico 2.0.
With costs in check, it has been able to keep decent margins in the low 20s with some volatility from weather and hurricanes.
Source: SNL Financial
The new plantings should increase market share within the industry and assuming flat margins will significantly grow earnings per share.
The other main uses of the capital freed up from recent and future ranch land sales are share buybacks and debt repayment. The accretion math on this is quite simple. Ranch land is producing so little revenue presently that the sales are at sub 2% cap rates. Buybacks at current market pricing would be at cap rates of about 5.8%. Debt repayments at around a 4% cost of debt are also accretive.
ALCO intends to lower debt to around $88 million and has been on that path for a few years.
Source: SNL Financial
I would anticipate a larger portion of sales to go toward debt paydown and citrus plantings/acquisitions and a fairly small chunk to go to buybacks. As each of these uses of capital is accretive, the net result would be higher earnings per share and less debt.
S&P Capital IQ reports consensus normalized earnings estimates for Alico rising to $2.07 in 2023.
Source: SNL Financial
This may look like a drop given the GAAP earnings estimate of $4.28 in 2021, but note that most of that is from the gain on sale of sold ranch land which is on the books at well below fair value. Netting out the 1 time items, it is significant growth.
Because of the volatility inherent in crop cycles and commodity pricing it is unlikely earnings will come in at exactly the number analysts have put forward, but I think that is a fairly good midpoint. This $2.07 covers the massively raised dividend at $0.50 quarterly.
Source: SNL Financial
Summary of buy thesis
Alico is trading at just over half the value of its land. This land is highly productive and even if not liquidated it is producing outsized earnings for shareholders. A 5.5% dividend yield and 17x earnings multiple strikes me as inappropriately cheap for a land play with growing earnings. It is a great income vehicle with the potential for significant capital appreciation as well.
All that said, there are some risks of which investors should be aware.
Risks to Alico
The citrus tree disease is a very well known risk in the industry. It is unknown if or when a cure will be found so it will likely continue to have adverse impacts on costs and yields. While Alico has adapted to this environment and has stayed profitable through it there is potential for it to become worse via affecting competitors differently.
For example, if Florida continues to struggle while other orange growing regions are able to beat the disease it might put Florida growers at a competitive disadvantage.
More specific to Alico is the risk of its revenue concentration. Roughly 87% of Alico’s revenues come from Tropicana. This is largely a good thing as Tropicana is a healthy counterparty, but it has the potential to create lumpiness. Rather than a small percent of contracts coming up for renewal each year, the majority of Alico’s contract revenue is going to be up for renewal in the same year.
At this point it looks like it will be a clean renewal with maybe a slight bump up in pricing to account for the now higher market rate, but it could depend on how the industry conditions look as it comes due.
Alico of course has the option to sign with other counterparties and will probably go to whomever offers the best price/pound, it could just be lumpy when so much is rolling over all at once.
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