Rural Funds Group (ASX: RFF) has had quite a remarkable recovery since the March market crash. The stock has been rallying and has been continuously posting new 52-week highs. Since we last covered the stock, the share price dipped and has gone back up. On the 11th of September, we posted a hold recommendation on the stock at a price of $2.28 a share. Any gains since were quickly corrected by the markets as uncertainty over lease and rent payments persisted.
What has changed however since early October is the recovery Australia has seen from the pandemic and the lengths the federal government has gone to in order to aid the recovery. The global market for agricultural products has also weathered the Covid19 storm. Commodity prices depend on supply and demand, and they have also relatively held their ground during this time. This has ensured that RFF’s portfolio of assets have performed relatively well during the crisis and hence, de-risks RFF.
Rural Funds Group has 61 properties in its portfolio. These assets derive value from its rental yields. The stability and sustainability of these rent and lease payments will determine how positive investors are in RFF. The market dynamics we mentioned earlier have thus strengthened the value of RFF as a whole.
Beta is a risk metric. It calculates how volatile a stock is compared to the entire market. Reuters estimates RFF’s beta to be 0.22 – this indicates that, if the market moves by 1% in either direction, RFF moves by just 0.22%. The low levels of correlation are just what we want to see in a stock – especially one that will also pay dividends.
From a financial standpoint, the fundamentals remain the same. What does change however, is the discount rates due to the de-risking. The lower levels of risk on the same cashflows demand a higher valuation. This is exactly what has happened to the stock price of RFF.
The diversification across commodities and region have worked well and will continue to do so. The diversity by region ensures that not all assets will be exposed to the risks that the climate poses. This has been one of the reasons why the firm has emerged unscathed from the horrible bushfires of late last year and earlier this year.
In order to improve on its diversification, RFF has reduced its reliance on almonds. On the 9th of October, the firm announced that the due diligence has been completed regarding the sale of one of its almond orchards.
Source: Rural Funds Group
The funds management business is risky given the current economic climate. Australia’s agricultural sector has endured a difficult year with draughts, bushfires, and then the pandemic – which sure would have disrupted and continues to disrupt supply chain and export. However, with the recent rains the agricultural industry has recovered and is forecast to pick-up slowly as Australia lines-up new trading partners in the post Covid19 due to relations with China – Australia’s largest trading partner having deteriorated.
Asset managers have therefore had to allocate their portfolio based on the different risk elements that are at play. The strategy will therefore be towards long term growth and earnings, rather than look for increase in earnings in the short-term. This is exactly what RFF has done – reducing its dependency on certain commodities. In order to generate long-term gains, RFF has mentioned that they will pursue M&As. The strong balance sheet certainly does provide enough flexibility for RFF to pursue M&As.
The outlook seems much clearer now as Australia recovers from the pandemic. While the recovery of its trading partners is crucial as well, given the dependency on Australia for its agricultural products and the importance of these commodities, RFF’s assets will be able to perform well.
The financial metrics have not changed from our earlier report, and we urge members to have a look at it in order to aid you make a fully informed investment decision. Profitability and financial health are strong for the firm. They also have a history of strong past performance.
The dividend policy of RFF is an attraction for investors. The latest dividend is $0.02 at a yield of 4.46%. The total dividends for FY2020 has a payout ratio of 80.6%. The firm has and will continue to prioritise on paying dividends to shareholders and this is also forecasted to increase in the years to come.
Rural Funds Group is in a very strong financial condition. The market dynamics have changed in the past 4 to 6 weeks as Australia looks to have emerged out of the pandemic. These dynamics have de-risked the firm. While significant growth is not expected given the maturity of the firm, they are however, pushing for M&As to drive growth in the years to come. The diversification of its assets further de-risks RFF. The dividends are good and are estimated to increase in the future. We recommend members to “Buy”.