Rural Funds Group

RFF Details

Completion of Entitlement Offer: Rural Funds Group (ASX: RFF) operates a diversified portfolio of Australian agricultural assets, which are leased predominantly to corporate agricultural operators. In the month of August 2021, RFF finished an entitlement offer of $100 million. The company would use the proceeds to finance macadamia orchard developments and to acquire cattle and cropping properties.

FY21 Financial Summary:

• Declining Property Revenue: During FY21, the company recorded a fall of 7% in property revenue to $67.16 million, mainly due to the sale of poultry assets and the Mooral almond orchard.
• Robust Growth in TCI: As a result of independent revaluations of cattle properties as well as the gain from the sale of the Mooral almond orchard, RFF recorded a rise of 100% in total comprehensive income (TCI) to $123.91 million.
• Achieved Target for DPU: Distributions per unit (DPU) for the year stood at 11.28 cents, which was in line with the targeted number.
• Surpassed AFFO Target: The company recorded AFFO (Adjusted funds from operations) per unit of 11.9 CPU (Cents Per Unit) against the forecast of 11.7 CPU.

AFFO and DPU Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Climate Change: The company is exposed to risk arising from the change in climate as it operates 66 agricultural assets, which could impact the valuation of assets.
• COVID-19: Uncertainties arising from the global pandemic could be a growth obstacle in the upcoming period.

Outlook:

• RFF is expecting to report a growth of 4% in DPU to 11.73 CPU in FY22 and AFFO per unit of 11.6 CPU.
• Rural Funds Management Limited (RFM), the responsible entity and manager of RFF, is looking to acquire additional cattle and cropping properties that have development potential.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: 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: As per the recent independent valuation, the company’s assets have been valued at $717.1 million as of June 2021 against $664.5 million as of December 2020. The company is trading near to its 52-week high of $2.750.  The stock of RFF gave a positive return of ~16.16% in the past six months. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a correction of single-digit (in % terms). The company can trade at a slight discount to its peers, considering the COVID-19 uncertainties, declining property revenue and rising property and other expenses. For the purpose of valuation, peers such as ALE Property Group (ASX: LEP), GDI Property Group Ltd (ASX: GDI), and Arena REIT No 1 (ASX: ARF) have been considered. Considering the expected correction, solid rally in past few months, current trading levels and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $2.750, up ~1.851% as on 23 September 2021.

RFF Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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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