Pinned valuation:
Justification
The Net Asset Value of this company is now around $3.14 per share, reflecting compound capital growth of around 11.6% annually. The current security price of $1.75 is well below the adjusted net asset value.
Portfolio assets are over $2 Billion and market cap is only $682 million. Five yearly market rent reviews should see sizeable increases in rents from natural resource assets.
Hi all.
I haven't looked into RFF specifically at all, so please bear this in mind.
I have been a Macadamia farmer (amongst other things) in the Northern Rivers for 15 years. The recent (roughly 3 years) farm gate prices of Macca's has been at or below the cost of production. This has lead to a significant land value price reductions, as expected. More orchards are being bulldozed clear than are being planted in my local area. As the effort to farm them, outways any expect return.
New Macca farms take at least 4- 5 years before any income is produced. It did take about 7-8 years before they turn a profit, at previously higher Farmgate prices.
The outlook for Macca's is cloudy at best. In fact, the recent poor performance of Macca's was part of my motivation for joining Strawaman in the first place.
As I mentioned, I have not looked at RFF in detail, but I thought it was worth adding my two cents worth.
@tomsmithidg RFF is a company I have held years ago, and did well out of, but I haven't held it in recent years, mostly because of a combination of their fee structure and capital structure - being stapled securities: Rural Funds Trust (RFT) plus RF Active (RFA) equals RFF, and because of the exposure to agriculture being so dependent on the weather. While I realise that RFF are the landlords of the land, not the producers of the almonds, macadamias, wine, cattle and crops that are produced using that land, those tenants need to do reasonably well to want to keep paying for the land and the annual rent / lease increases that RFF apply. So weather plays a big part in how well RFF's tennants fare, and this in my mind indirectly impacts RFF's ability to charge what they do for the land use, so I still see this as agricultural exposure with all of the risks that come with that.
In terms of their fees and capital structure, I'm no expert on it, but I felt at the time I exited RFF that the management of RFF were disproportionately benefitting financially at the expense of shareholders / unitholders in the RFF stapled securities, i.e. us. I later had a similar feeling about Infratil (IFT) who I also held and then took profits and exited, because while I liked IFT's assets, especially their 49.75% stake in Canberra Data Centres (CDC), plus their various renewables exposure which they were managing to monetise very well around that time, and their move into radiology with Qscan, as well as their stake in Wellington Airport which was a no-brainer money-printing opp, like most major Airports are in Oz and NZ. My thoughts were that their fee structure was often opaque and their management structure was also set up to double dip on fees, or at least that's the way I saw it at the time. So while their track record of value creation looked great on paper, there didn't seem to be a whole lot of those profits finding their way through to holders of IFT shares.
Don't get me wrong, I did alright out of them, both RFF and IFT, and enjoyed their dividends / distributions as well as some capital growth at the time, however my thoughts were that the sort of growth in the share price (/unit price) of both was probably not sustainable because the largest beneficiaries of their success appeared to be their management teams who enjoyed both high salaries and very generous bonuses in some cases, particularly with IFT.
My price target for IFT was between $10 and $11, and I sold out as the approached $10, from memory, and then after trading at around $10 for around 6 months last year they popped up to around $12 (their one year high is $12.05) and are now back down at $9.53, so possibly the hype was too good to be true, or else this could be a dip before they go back up to new highs. I don't follow them too closely now.
RFF had a great run that was all north east at a good clip through to the end of 2021, however 2022 saw their SP drop from $3.18 down to $2.40, and by the end of 2023 they were trading at $2.12; they're now at $1.75, so they're approaching half of what they were (per share / unit) at the end of 2021.
There will have been multiple factors involved in that RFF share price drop that started in 2022, however I would point to their dividends as being most likely the biggest one, particularly because RFF were seen by many in that 2015 to 2021 period as a reliable income play who raised their dividends every year:
Sure, that 6.7% annual yield looks juicy, but remember that their distributions are all unfranked (zero per cent franked) and their distributions were rising EVERY year up until mid-2022, and then they stopped rising and have been flat; their last 15 quarterly distributions have ALL been 2.9 cents/share unfranked.
Also, that yield has been rounded up; their historical trailing dividend yield based on today's $1.75 share / unit price is 6.63% and that's only that high because the share price has come down so much. At the end of 2022, when RFF's share / unit price was $2.41, their trailing dividend yield was 4.8%, and their dividends have been flat since then, and have always been unfranked so there are zero franking credits with RFF.
Back at the end of 2021, when their share price was $3.18, their last 4 dividends added up to 11.4 c/share, so their trailing yield was 3.58% unfranked. Not exactly stellar if they didn't raise their dividends further from there, and they didn't. Their share price understandably fell and kept falling, and now, down at $1.75 paying $0.116 p.a. in divs, RFF's dividend yield looks a bit more respectable at 6.63% unfranked.
When the dividends stops growing, you would want to see some capital growth, and they haven't provided that, with their share price going mostly down for the past 3 years and 3 months.
Another thing worth mentioning is that while their NTA is significantly higher than their share price, their NTA is based on valuations which are somewhat subjective, such as land and water rights. Yes, they do get audited and they also get independent valuations of their assets on a regular basis, however valuing land and water rights has to be based on some assumptions, and not all of those assumptions are ultimately going to be 100% right. That's why you will see their various assets revalued on a regular basis.
The fact that their distributions have been flat for the past 14 distributions (i.e. last 15 have all been 2.9c/share unfranked) suggests that they haven't been able to add a lot more value in recent years, and that any value add that they have achieved has been paid out in management fees.
So their large NTA discount is likely the market marking them down based on (a) not fully accepting their own asset valuations, and (b) far less demand for them now that they are not growing their distributions or their share price.
Probably confirmation bias on my part, because I sold out of them a few years ago, but that's how I see it anyway Tom.
Disc: Not held.
P.S. When I say the market might not be fully accepting RFF's asset valuations (that make up their NTA), I'm not suggesting that the valuations are wrong, or that the market doesn't believe them, I am suggesting that the market may be factoring in that the valuations can change a lot based on the assumptions that they are based on, such as water demand and the demand for that land that RFF own, and just how productive that land can be, and for how long.
So the market might not be fully accepting those asset valuations and therefore that NTA (/NAV) in terms of saying that RFF is X% undervalued because their SP is X% lower than their NTA. It's just not as cut and dry as say a traditional LIC where they hold shares in listed companies that have very easy and widely accepted price discovery available for them through the sharemarket.