ALF.Allied Farmers Ltd

[Mos]

Prospects look good.
However I sold the wife's holding and recycled the funds into more 2CC for her.
Reason being 2CC's fully imputed divies.Currently gross yield of 13.282%.Next divie due end of November.

Fair enough. ALF not her stock if its dividends she is after. Long term hold for me. Now they are starting to build a cash pile it will be interesting to see what kind of profit making business can acquire to deliver value from the mountain of tax losses.

[Plata]

I wonder what it is they sold to gain 4 million on book value? Quite significant on a 23 million market cap, does that not represent ~13 cents per share added to NTA? Market reaction pretty muted really. It would be good if at the next result they can give some more detail on their plan to get the wheels turning here.

[Plata]

Looking at the balance sheet last period, after this half worth of profit + the one off sale, the company should be debtless.

[Mos]

Solid progress from ALF with momentum building in NZRLM and one off gain from sale of interest in saleyard. Cash on hand building towards $10 m. Next step to acquire an asset with an income stream to accelerate the utilisation of the mountain of tax losses.

https://www.nzx.com/announcements/436768

[Plata]

Does anyone else think Richards compensation package is a bit high for such a small company? 500k p/a for 24 mil market cap?? And FY25 is even higher...

[Plata]

Another result, another nothing. Suddenly they are experts at pricing dairy loans and buying mortgagee property. The loan terms for both things are too good to be true, borrowing at under 4%? Loaning at 15%? And no real details given about either transaction despite both being pretty material to the company.

The question is, when will the underlying performance of the business be worth anything to anyone. The PE has stayed under 8 for ages meanwhile NPAT and NTA creep up. Are we just meant to wait 50 years or so for them to get through all the unutilised tax losses? Most companies don't even last that long. They say being early is the same as being wrong, and I think that's pretty true here. Seems like dead money.

[Mos]

Another result, another nothing. Suddenly they are experts at pricing dairy loans and buying mortgagee property. The loan terms for both things are too good to be true, borrowing at under 4%? Loaning at 15%? And no real details given about either transaction despite both being pretty material to the company.

The question is, when will the underlying performance of the business be worth anything to anyone. The PE has stayed under 8 for ages meanwhile NPAT and NTA creep up. Are we just meant to wait 50 years or so for them to get through all the unutilised tax losses? Most companies don't even last that long. They say being early is the same as being wrong, and I think that's pretty true here. Seems like dead money.

Deafening silence response to your post Plata kind of says it all - no real interest and no near term catalyst for rerate despite pretty compelling valuation. Slow burn investment this one - I continue to hold as value is there and growing. Lack of disclosure to the market when deals are done, like the recent SPV and the sale yards transaction a while ago, is a bit cowboy and questionable in terms of continuous disclosure obligations.

[Plata]

Deafening silence response to your post Plata kind of says it all - no real interest and no near term catalyst for rerate despite pretty compelling valuation. Slow burn investment this one - continue to hold as value is there and growing. Lack of disclosure to the market when deals are done, like the recent SPV and the sale yards transaction a while ago, is a bit cowboy and questionable in terms of continuous disclosure obligations.

Exactly. Taking on debt of more than 50% of market cap with the SPV and not only saying nothing until the results day, but also never saying the addresses or any details about the properties. Assuming that whole fiasco pans out fine I agree there is value here but as you say no near term catalysts. Chances are there will be no news for 6 months until the next result, so why hold during that time period?

[Mos]

Rural news happy valley

NBR link

Bayleys happy valley

I hear you. This is what I ALF now own via the SPV. Pretty interesting deal buying through a SPV for the value of the loan (no money down) with no recourse to ALF if it goes pear shaped. Also with very low interest rates payable on the loan. Seems like a deal to pick up assets cheaply which probably turned a non performing loan into a performing loan for the bank concerned, for which they were agreeable to providing the 100% funding at a much lower than market interest rate. Potentially a clever deal by ALF if the asset is worth more than what ALF paid. No downside but has upside. Doesn't change the disclosure shortcomings though.

[Mos]

Dragging Allied Farmers (ALF) up from page 6 to outline why I see long term value for discussion. It is an uncrowded trade which makes some sense as the current market cap (at share price of $0.75) of $21.6m is way too small for brokers or institutions to be interested. Also, the complete lack of dividends for the foreseeable future while ALF utilises its mountain of tax losses will not suit many retail investors.

In looking at ALF I am taking a 10 year view (cue brickbats from BlackPeter regarding predicting the future) of what it could be worth with what I think are fairly conservative assumptions in this base case, making the assumption that Management does not do something that is massively value destroying.

The current market cap as noted above is $21.6m. Post the sale of the NZ Farmers Livestock business I am estimating that when ALF reports towards the end of this month they will have $18m+ of cash/near cash assets, ~$3.9m investment in NZX listed New Zealand Rural Land company (NZL), plus ownership of New Zealand Rural Land Management (NZRLM) which holds an evergreen contract to manage the assets of NZL for a fee of 0.5% p.a. plus transaction fees plus performance fees of 10% of increases in NZL's NTA. I am ignoring the $10m or so of assets and loans relating to the non recourse SPV that acquired the Happy Valley assets which may offer further upside and comes with no downside as ALF can walk away if it is not in the money.

With this in mind, I see four potential sources of value in 10 years time as outlined below.

Cash/near cash of $18m+ currently. Hard to predict how this will grow in value over the next decade. Indications are that ALF plans to deploy this by buying income generating assets/business to create value and help utilise the tax losses. They have also suggested it could be used to invest in NZL (NZL has recently adopted a dividend payout policy of 90-100% which should approximately deliver a 5% net return). In this base case I assume the $18m compounds at 5% p.a implying a value from this component of $29.3m in ten years. It should be possible to generate better returns than that but the idea in the base case is to be relatively conservative.

Investment in NZL. ALF currently owns 3.933 m shares in NZL which is 2.7% of the 146.1m shares issued. The performance fee of 10% of the increase in NZL's NTA is issued in shares at a price equivalent to NTA. I am assuming in the base case that NTA increases by 3% p.a., noting that most of the lease rentals are adjusted upwards by CPI at regular intervals. So for example in the year to Dec 2025 NZL had $445m of assets so 3% of this would be an increase of $13.3m and 10% share for ALF would be $1.33m. We will get to see the actual amount for CY2025 when NZL releases it's results in late Feb. It could be higher or lower in any given year but the 3% p.a.assumption over a decade seems reasonable. If ALF's CY2025 performance fee is $1.33m and these shares are issued at NTA of around $1.60. ALF would receive another ~830,000 shares in NZL which would represent 0.56% of NZL shares. So if ALF achieves a performance fee that provides 0.5% of NZL shares every year for a decade it will own around 7.7% of NZL in 2036 (2.7% already owned plus 5%). The next question is how much is this likely to be worth? If NZL farmland assets grow by 3% p.a. (assumed land value increase with no acquisitions) they would increase from $445m to around $600m. Assuming liabilities remain the same (no new assets assumption) except for growth in the amount of ROC's redeemable limited partnership units from $76m to say $115m, then total liabilities would grow from $215m to ~$253m meaning that net assets would grow from $230m to $346m. This all assumes no net new assets are acquired which is conservative as there will be opportunities to grow the asset base as rental income grows. NZL shares are currently trading at 62.5% of NTA so if that gap does not close, ALF's ownership stake in NZL in a decade based on the above assumptions could be $346m x 62.5% x 7.7% = $16.6m in ten years.
 
Dividends received from NZL over the next decade. This is a minor component so I will leave out the calculations and just provide the estimate of $4.7m over the ten years.

The value of the asset management business. In all the analysis I am assuming that the 0.5% annual fee and the transaction fees cover costs but do not provide any profit, so all of the assumed profit from the asset management business is from the performance fee. In a decade if NZL assets are $600m and annual growth in NTA is 3%, the performance fee of 10% would deliver $1.8 m in profits for ALF. Applying a PE ratio of 15 to this results in an estimated value for the asset management business of $27m in ten years time.

So the components of $29.3m + $16.6m + $4.7m + $27m = $77.6m in 2036. This is 3.6 times the current market cap representing a CAGR return of 13.6% p.a. Clearly there are a lot assumptions and plenty of opportunity for Management to destroy potential value. However, to date Management has done reasonably well in my view. As noted this is my conservative case and I am hoping for a higher return if Management executes well on the opportunities.

I welcome feedback and appreciate any testing of the above along with alternative views. Being the ALF page, I am aware I may just be talking to myself.     
 

[Fiordland Moose]

good post...a lot to unpick there...will have a go at some point.
but ultra slow long burner this one.
the economics of the asset mgmt business are v good. but it remains to be seen how well they use their cash from the recent sale.

[Mos]

good post...a lot to unpick there...will have a go at some point.
but ultra slow long burner this one.
the economics of the asset mgmt business are v good. but it remains to be seen how well they use their cash from the recent sale.

Thanks FM. Agree slow burn and it is the capital light high ROIC nature of asset management that is the most attractive aspect of ALF. Also your point on the risk around how the cash is deployed is well made - I am relying to some extent on 20% shareholder WAF (Waterman Capital principals) vetoing anything daft along with the fact that the MD owns a significant chunk of the company so has serious skin in the game. I look forward to any further perspectives you have.

[Plata]

Dragging Allied Farmers (ALF) up from page 6 to outline why I see long term value for discussion. It is an uncrowded trade which makes some sense as the current market cap (at share price of $0.75) of $21.6m is way too small for brokers or institutions to be interested. Also, the complete lack of dividends for the foreseeable future while ALF utilises its mountain of tax losses will not suit many retail investors.

In looking at ALF I am taking a 10 year view (cue brickbats from BlackPeter regarding predicting the future) of what it could be worth with what I think are fairly conservative assumptions in this base case, making the assumption that Management does not do something that is massively value destroying.

The current market cap as noted above is $21.6m. Post the sale of the NZ Farmers Livestock business I am estimating that when ALF reports towards the end of this month they will have $18m+ of cash/near cash assets, ~$3.9m investment in NZX listed New Zealand Rural Land company (NZL), plus ownership of New Zealand Rural Land Management (NZRLM) which holds an evergreen contract to manage the assets of NZL for a fee of 0.5% p.a. plus transaction fees plus performance fees of 10% of increases in NZL's NTA. I am ignoring the $10m or so of assets and loans relating to the non recourse SPV that acquired the Happy Valley assets which may offer further upside and comes with no downside as ALF can walk away if it is not in the money.

With this in mind, I see four potential sources of value in 10 years time as outlined below.

Cash/near cash of $18m+ currently. Hard to predict how this will grow in value over the next decade. Indications are that ALF plans to deploy this by buying income generating assets/business to create value and help utilise the tax losses. They have also suggested it could be used to invest in NZL (NZL has recently adopted a dividend payout policy of 90-100% which should approximately deliver a 5% net return). In this base case I assume the $18m compounds at 5% p.a implying a value from this component of $29.3m in ten years. It should be possible to generate better returns than that but the idea in the base case is to be relatively conservative.

Investment in NZL. ALF currently owns 3.933 m shares in NZL which is 2.7% of the 146.1m shares issued. The performance fee of 10% of the increase in NZL's NTA is issued in shares at a price equivalent to NTA. I am assuming in the base case that NTA increases by 3% p.a., noting that most of the lease rentals are adjusted upwards by CPI at regular intervals. So for example in the year to Dec 2025 NZL had $445m of assets so 3% of this would be an increase of $13.3m and 10% share for ALF would be $1.33m. We will get to see the actual amount for CY2025 when NZL releases it's results in late Feb. It could be higher or lower in any given year but the 3% p.a.assumption over a decade seems reasonable. If ALF's CY2025 performance fee is $1.33m and these shares are issued at NTA of around $1.60. ALF would receive another ~830,000 shares in NZL which would represent 0.56% of NZL shares. So if ALF achieves a performance fee that provides 0.5% of NZL shares every year for a decade it will own around 7.7% of NZL in 2036 (2.7% already owned plus 5%). The next question is how much is this likely to be worth? If NZL farmland assets grow by 3% p.a. (assumed land value increase with no acquisitions) they would increase from $445m to around $600m. Assuming liabilities remain the same (no new assets assumption) except for growth in the amount of ROC's redeemable limited partnership units from $76m to say $115m, then total liabilities would grow from $215m to ~$253m meaning that net assets would grow from $230m to $346m. This all assumes no net new assets are acquired which is conservative as there will be opportunities to grow the asset base as rental income grows. NZL shares are currently trading at 62.5% of NTA so if that gap does not close, ALF's ownership stake in NZL in a decade based on the above assumptions could be $346m x 62.5% x 7.7% = $16.6m in ten years.
 
Dividends received from NZL over the next decade. This is a minor component so I will leave out the calculations and just provide the estimate of $4.7m over the ten years.

The value of the asset management business. In all the analysis I am assuming that the 0.5% annual fee and the transaction fees cover costs but do not provide any profit, so all of the assumed profit from the asset management business is from the performance fee. In a decade if NZL assets are $600m and annual growth in NTA is 3%, the performance fee of 10% would deliver $1.8 m in profits for ALF. Applying a PE ratio of 15 to this results in an estimated value for the asset management business of $27m in ten years time.

So the components of $29.3m + $16.6m + $4.7m + $27m = $77.6m in 2036. This is 3.6 times the current market cap representing a CAGR return of 13.6% p.a. Clearly there are a lot assumptions and plenty of opportunity for Management to destroy potential value. However, to date Management has done reasonably well in my view. As noted this is my conservative case and I am hoping for a higher return if Management executes well on the opportunities.

I welcome feedback and appreciate any testing of the above along with alternative views. Being the ALF page, I am aware I may just be talking to myself.     
 

I think the $77 million value in 10 years is a bit misleading even if achievable, given it does not account for time value of money or the value drag of richards extremely generous compensation package and the inevitable compound growth that will enjoy. Or any of the other expenses for that matter? 5% return on the entire cash/near cash balance just barely covers paying for richard.

I've been tempted by this one recently however was put off somewhat by the size of the compensation package vs market cap & the fact that he did not reply to my email asking about certain contents of the AGM presentation. The other thing that disuaded me was the $3 million loan (15% of company market cap) to some agricultural operation. Is ALF a more competitive source of loans than an actual bank? Are the actual banks trying to reduce agricultural exposure? Or has ALF priced the loan with a lower level of implied risk than the actual banks. The lack of transparency in numerous areas here is offputting, reading their documents I don't get the sense that they have a clear strategy other than a general "rural vibe". What happens to the cash pile will decide whether or not this  company remains dead money for the next 4 years, I don't think it is possible to accurately value the business until it is deployed or a more tangible plan is outlined.

At an 8% discount rate 77 million in 2036 is worth around $36 million today.

[Plata]

I thought this wasn't going to go anywhere but it seems I was wrong. What PE ratio should this trade at? The fund they run NZL trades at a 40% discount to NTA despite numerous recent transations at book value. It has been said this is partially due to the high management fees and low liquidity. You could argue the same applies here, maybe to an even higher degree. I reckon this ends up back in the $0.50's