Company Overview: Rural Funds Group (ASX: RFF) is an agricultural Real Estate Investment Trust (REIT) with a diversified portfolio of Australian agricultural assets. RFF comprises the stapled units in two Trusts, Rural Funds Trust (RFT) and RF Active (RFA). RFF derives its revenue from leasing almond orchards, macadamia orchards, cropping properties, agricultural plant and equipment, vineyards, cattle properties, cattle, and water rights. Rural Funds Management Limited, an agricultural fund, and asset manager, is the responsible entity and manager of RFF.
RFF Details
Long-term Outlook Supported by Portfolio Diversification: Rural Funds Group (ASX: RFF) is an agricultural Real Estate Investment Trust (REIT) that owns a diversified portfolio of Australian agricultural assets which are leased predominantly to corporate agricultural operators. As on 29 April 2021, RFF’s market capitalisation stood at ~$804.41 million. During FY20, RFF reported decent financial performance, mainly due to the expansion of the portfolio, primarily in the cattle sector, and independent valuations of various assets. RFF witnessed 8% YoY growth in property revenue and 82% YoY in Earnings per unit (EPU) in FY20. Over the last five years, RFF has maintained a track record of paying consistent and growing distributions to its shareholders. From 2015 to 2020, RFF’s distribution has increased at a CAGR of ~4.78%.
Looking ahead, RFF is focused on investing in sectors in which Australia participates globally. Further, it intends to improve its portfolio diversification, and utilise RFM’s development and operating knowledge. RFF’s responsible entity, RFM, intends to keep its focus on productivity improvements and using developments to generate earnings growth in years to come. In FY21, RFF expects a reduced AFFO of 11.7 cents per unit, as compared to 13.5cpu in FY20, as funds are reinvested to macadamia orchard developments which are expected to produce decent income when leased. RFF continues to target distribution growth of ~4% per annum.
Historical Performance Metric (Source: Company Reports)
Decent Growth H1FY21 EPU: For the half-year ended 30 December 2020, RFF reported property revenue of $33.91 million, down from $37.59 million in the previous corresponding period (pcp), primarily as a result of the poultry asset disposal ($71.4 million), offset by the income from new acquisitions, development capital expenditure, lease indexation and increase in J&F guarantee income. The adjusted funds from operations (AFFO) per unit stood at 6.6 cents, in line with FY21 forecasted AFFO. The company’s earnings per unit (EPU) grew by 94% YoY to 17.26 cents, due to the gain associated with the disposal of the Mooral almond orchard and independent valuation of Rewan cattle property. Adjusted net asset value (NAV) per unit stood at $2.01 in H1FY21, representing 4% growth on pcp. As at 31 December 2020, RFF has 67 properties across five agricultural sectors (almonds, cattle, cropping, vineyards and macadamias).
H1FY21 Results (Source: Company Reports)
FY20 Result Highlights: For the year ended 30 June 2020, RFF reported property revenue of $71.97 million, up 8% on FY19, primarily due to the JBS Australia transactions (feedlot acquisitions and J&F Australia Pty Ltd Guarantee income), cattle property acquisitions, development capital expenditure and lease indexation. RFF’s earnings per unit grew by 82% to 18.43 cents in FY20, largely due to the ongoing expansion of the portfolio, primarily in the cattle sector, and independent valuations of various assets. AFFO per unit stood at 13.5 cents in FY20, up from 13.3 cents in FY19. During the year, RFF sold poultry assets for $74.7 million and unencumbered ground water entitlement for $6.7 million.
FY20 Results (Source: Company Reports)
Key Metrics: Over the past five years, the company has maintained decent profitability margins. Gross margin for FY20 stood at 96.9%, slightly down from 97.2% in FY19. EBITDA margin in FY20 stood at 82.5%, up from 81.3% in FY20. Current ratio for FY20 stood at 3.48x, up from 0.48x in FY19.
Profitably Metrics & Liquidity Profile (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 34.66% of the total shareholding, while the top four constitutes the maximum holding. Vanguard Investments Australia Ltd. and Netwealth Investments Ltd. are holding a maximum stake in the company at 9.61% and 5.26%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Growing Distribution Per Share Over the Past Six Years: RFF has a track record of paying consistent and growing dividends to its shareholders. From 2015 to 2020, RFF’s distribution has increased at a CAGR of 4.78%. For FY20, RFF paid a distribution of 10.85 cents per unit, up 4% on FY19. For H1FY21, RFF has paid distribution of 5.64 cents per unit, up 4% on pcp. For Q3FY21, RFF has declared dividend of 2.82 cents per unit. The distribution has an ex-date of 30 March 2021 and payment date of 30 April 2021. At CMP of $2.350, RFF’s annual dividend yield stood at ~4.71%.
DPS Trend (Source: Company Reports)
Acquisition of Central Queensland Water Allocation: In December 2020, RFF exchanged contracts with Sunwater Limited for the purchase of a 21,600 ML Medium Priority Lower Fitzroy River water allocation for a total consideration of $32.4 million. The allocations will be used for the development of macadamia orchards, and development of irrigation for cropping and cattle production. The transaction is expected to be completed in 2023.
Key Risks: RFF is exposed to the risks related to the change in the valuation of its properties. RFF is also exposed to the risks related to climate change that could impact the valuation of its assets. RFF is exposed to the risks and uncertainties caused by the COVID-19 pandemic.
Outlook: In line with RFM’s strategy of investing in sectors in which it has development and operating knowledge, RFF is making investments into macadamia sector which has a number of appealing characteristics, such as low levels of existing global production and increasing demand. It is expected that macadamia orchards will provide development gains, increased rental income, improved diversification and increased weighted average lease expiry (WALE). In 2021, RFF is planning to develop 500 hectares of macadamia orchards.
In order to increase revenue generation, RFM is in process of securing lessees. In FY21, RFF expects its AFFO to be around 11.7 cents per unit and DPU to be around 11.28 cents per unit. For FY22, DPU is expected to be around 11.73 cents per unit, representing 4% increase on FY21 forecasted DPU.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: Over the last three months, the stock of RFF has corrected by ~4.52%. The stock has a 52-week low and high of $1.832 and $2.715, respectively. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peers, considering its decent H1FY21 results, growth in DPU, and expected benefits from macadamia orchards. We have taken peers like ALE Property Group (ASX: LEP), Charter Hall Social Infrastructure REIT (ASX: CQE), Vitalharvest Freehold Trust (ASX: VTH), which comes under Specialized REITs sector. Considering RFF’s diversified portfolio of Australian agricultural assets, its decent financial performance in H1FY21, track record of paying growing distributions, decent long-term outlook, and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.350, down by 0.844% as on 29 April 2021.
RFF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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