Going through SEC filings last week, I found an agriculture company which filed a prospectus/S-11 registration for certain real estate companies. The company is Gladstone Land Corporation which owns 12 farms in California and Florida which are leased to six companies. It may take a while for this company to complete its IPO and trade publicly (they tried this as well in 2010). Therefore, I decided to find a publicly traded agriculture company which would be interesting to analyze.
This is how I discovered Alico Inc. (NASDAQ:ALCO). The company was founded in 1960 and owns about 130,300 acres of land in Florida and has a $228 million market capitalization. Third Avenue Management, a value investment company, holds 222,465 shares, about 3% of shares outstanding as of June 30, 2012.
Alico Inc. is a land management company with operations in both agriculture and non-agriculture. It reports its operations in six separate strategic business units:
1. Bowen Brothers Fruit LLC: Bowen provides citrus supply chain management for Alico’s citrus crop and other growers along with purchases and resales of citrus fruit.
2. Citrus Groves operations: consist of cultivating citrus trees for production of citrus fruit for delivery to the fresh and processed citrus markets.
3. Sugarcane operations: consist of cultivating sugarcane for sale to a sugar processor.
4. Cattle operations: primarily include production of beef cattle for sale and raising replacement heifers.
5. The real estate segment, operated on behalf of Alico by ALDI: engaged in the planning and strategic positioning of all land, which includes seeking entitlement of land assets in order to obtain, enhance and preserve rights to develop the property in the future and negotiating and/or renegotiating sales contracts.
6. The land leasing and rentals segment: leases land to others on a tenant-at-will basis for grazing, farming, oil and mineral exploration, recreational and other uses.
Revenues: The company has grown revenue at annualized rate 7.2% over the last 10 years. Alico has consistently generated most of its sales from the citrus industry, with revenues from the citrus with citrus groves and Bowens operations (citrus operations) with 75% in fiscal year 2008, 71% in fiscal year 2009, 82% in 2010, in fiscal year 2011 and 9 months 2012 at 85% (the business has a seasonal nature; as a result, nine months may not be indicative of fiscal year 2012 final results). Alico’s largest customer accounted for approximately 28% of operating revenue in fiscal year 2011.
|Revenue Share by Business Unit||9 months FY2011||FY 2011||FY2010||FY200||FY2008|
Seasonal Nature of Business:
|Early/Mid Varieties of Oranges||November thru February|
|Valencia Oranges||February thru June|
|Sugarcane||November thru March|
|Beef Cattle||July and August|
An analyst may be able to get an indication of quarterly revenues from watching prices for each of these commodities in real time. For example, Live Cattle for July and August of 2011 ranged from $1.24 to $1.26 pounds. Compare this to July and August 2012 range of $1.20 to $1.27 pounds. Cattle are a very small percentage of revenue for Alico and thus not material in forecasting quarterly revenue. A similar analysis of oranges would be more material as they are a higher percentage of sales. There was no public information on any sales agreements for oranges, sugar or cattle that may exist with its customers.
Gross Profit Margins: The company has managed to improve margins in nearly all business units.
|Gross Profit margins by Business Unit||9 months FY2011||FY 2011||FY2010||FY2009||FY2008|
*Excludes intersegment revenue and expense
Land Valuations: All land is not equal, but public information does provide clues as to the value of the company’s land. Going back to the company that introduced the article Gladstone Land, in their SEC filing S-11, they have appraisals listed on four Florida fruit and vegetable farms. According to the Alico’s recent investor presentation, the company estimated the replacement cost of assets with groves at about $100 million dollars for the 9,764 producing citrus acres. The company also sold two parcels in Polk county at $2,500 and $2,750 per acre in 2012.
Alico Inc. & Subsidiaries Current Land Utilization (1) as of September 30, 2011
|Total Citrus Groves||10,214||3,652||3,010||3,552||—||—|
|Cattle (improved pastures) (2)||10,040||10,040||—||—||—||—|
|Grazing and other||12,181||1,977||6,182||4,022||—||—|
|Commercial and residential||5,238||54||66||—||—||5,118|
|Infrastructure and other||23,847||19,633||952||3,262||—||—|
|June 30, 2011 adj. from sales (4) 135,590 polk -7,456|
(1) Approximately 72,551 acres of the properties listed are encumbered by LOC, term note and mortgage.
(2) Cattle also graze approximately 40,000 acres of property listed as recreational leases.
(3) Harvested acres during fiscal year 2011.
(4) As of June 30, 2012 the company now has 135,590 acres (this includes approx 5000 acres of a pending sale in July and Oct.). The company sold two parcels in Polk County which were considered surplus property sales. The first parcel of land totaled 3,630 acres. The sales price was $9,077,000 or $2,500 per acre. The sales contract closed on June 14, 2012, with the deed and possession delivered to Ben Hill Griffin III. The second parcel of land totaled 380 acres for which we received $1,021,000 in cash. The sales price was $1,045,000 or $2,750 per acre. The sales contract closed on June 20, 2012, with deed and possession delivered to Ben Hill Griffin Inc. (“Griffin Inc.”).
On July 11, 2012, the company finalized obligations related to the May 16, 2012 settlement with IRS Appeals for the tax years 2005 through 2007.
In July 2012, Magnolia TC2,llc (Alico owns 39%) commenced the tax deed application process as the two-year redemption period on certain tax certificates has been reached. Magnolia is a Florida limited liability company whose primary business activity is acquiring tax certificates issued by various counties in the state of Florida on properties which have property tax delinquencies. The tax deed application requires all other outstanding liens to be redeemed as well. If the property owner does not redeem such certificate within two years, which requires the payment of delinquent taxes plus the bid interest, a tax deed can be obtained by the winning bidder who can then force an auctioned sale of the property. Tax certificates hold a first priority lien position. This will result in additional revenue stream which will now become a contributor to revenues.
Management: JD Alexander, who has over 30 years of experience with Florida Citrus, had been appointed Alico’s president and CEO in February 2010, a company which his grandfather founded. The problem was that Alexander was also the president and CEO of Atlanticblue Group Inc. As of March 31, 2012 he resigned and is free of those duties with Atlanticblue. Additionally, he is a state senator, and his term will be up in November 2012. Beginning in November, Alexander will finally be able to dedicate all his time to Alico's success. According to a recent investor presentation on their website, the company sees an opportunity to expand its citrus operations.
Atlanticblue is a real estate management, acquisition and development company with with properties in Central and South Central Florida. Atlanticblue Group Inc. owns approximately 51% of Alico’s common stock. By virtue of its ownership percentage, Atlanticblue is able to elect all of the directors and, consequently, control Alico. Directors which also serve on Atlanticblue’s board are referred to as “affiliated directors.” Atlanticblue issued a letter dated Dec. 3, 2009, reaffirming its commitment to maintain a majority of independent directors (which may include affiliated directors) on Alico’s board.
Management effectiveness can be measured by Return on Capital. The formula for return on capital I use is EBIT / (Receivables + Inventory + Other Current Assets + PPE) - (Payables + Other Current Liabilities). For FY2011, the Return on capital was 10.4% and was in the top quartile of its industry peers. The ROC has varied and is volatile with an average of 3.9% over the past five years.
Amounts in Millions as of June 30th, 2012
|Type||Maturity||Effective Interest Rate||Remaining Principal Balance||Est. Annual Debt Payments (P&I)|
|Rabo AgriFinance, Inc.||RLOC- $60 million||Oct 2020||2.49%||$0||varies|
|Rabo AgriFinance, Inc.||Term||Oct 2020||2.74%||$38.50||$3.4|
|Farm Credit of Florida||Mortgage||Mar 2014||6.68%||$2.21||$1.2|
Cash flow from operations has averaged $10.5 million over the past five years which is more than enough to cover debt service. Additionally, Interest coverage was 13.71 which is considered 77% higher than it peers.
At June 30, 2012 , Alico was in compliance with all of its covenants under the various loan agreements. The Rabo covenant was amended for the company to be in compliance. The company and Rabo amended the consolidated current ratio from not less than 2.00:1.00 to 1.50:1.00. Additional covenants are a debt ratio no greater than 60%, tangible net worth of at least $80 million and a minimum debt coverage ratio of 1.15:1.
The company has a strong balance sheet with very little debt compared to its peers. At June 30th 2012, the quick ratio was 1.57, in the top 70% of its peers, with a 3 year average of 1.9. The current ratio for the same period was 2.67 with a 3year average of 3.75.
Total Debt to Equity was .32 as of June 30, 2012. This is in the lower quartile of its industry peers and indicates a company that is less aggressive at financing growth than its peers.
Debt to Revenue was .59 at June 30th 2012. I use this as a red flag it the value is over one, especially if I am lending to the company. At 1 and an interest rate of 6% , 6 % of sales would go to interest payments alone. That would be a big reg flag in the lending community.
The company has a strong cash position with $14 million as of June 30th 2012 and more cash coming from land sale looking to close next quarter in October 2012. Total equity was $129 million at June 30th 2012.
Summary: Alico is poised to benefit from a CEO that is finally dedicating all his focus to the company and has stated his goal of increasing the citrus business. The company has a strong balance sheet with plenty of land and is well capitalized to make this happen. The risk of a 51% owner is apparent and may limit the stock's future value, as no hedge fund activist would consider purchasing the stock to change the board, a losing battle. But this is not always the case, as Carl Ichan’s property company was undervalued, but when RE prices accelerated to the upside his company's stock price caught up with RE valuations. Additionally, one customer was 28% of sales which is a high concentration and red flag for most industries. It is more acceptable in this industry, as logistics plays a role in customer location. The company can benefit from increases in the price of citrus and sugar. Orange juice futures are trading near an all-time high and sugar is still about 70% below it all-time high of $0.65 cents in November 1974. Although an ancillary business venture, Magnolia may prove to be a double-digit revenue percentage provider in the near future. If you believe as I do that sugar will hit its all-time high before this commodity market cycle ends and we have not seen the highs in agriculture land, then I would take a closer look at Alico Inc.
About the author:
• Realized average annualized returns on self managed IRA account of 14% from January 2004 to December 2012 (total return 150+).
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