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Date : 21/02/2022

Rural Funds Group

ASX :

RFF

Market Cap : $1.11 Billion

Dividend Per Share : $0.114

Dividend Yield : 4.04 %

Buy

52 Week Range : $2.26 - $3.22

Share Price : $2.82

RFF is an extremely stable business with consistent cash flows and growing dividends. We recommend a "Buy".

Company Analysis

It’s been a fantastic earnings season as far as dividend stocks are concerned. To wrap up the week here is arguably one of the best defensive stocks – Rural Funds Group (ASX: RFF) announcing another positive performance. Rural Funds owns a diversified portfolio of agricultural assets leased predominantly to corporate operators.

The highlights of RFF’s financials are:

  • Adjusted funds from operations (AFFO) of 5.8 cents per unit (cpu), in line with forecast.
  • Distributions per unit (DPU) of 5.87 cents, in line with forecast.
  • Earnings (total comprehensive income) of 10.36 cpu.
  • Adjusted net asset value (NAV) increase of 3% to $2.24 per unit.
  • Gearing of 33%, within the target range of 30-35%.
  • FY22 forecast distributions 11.73 cpu, a 4% increase on FY21.

Property revenue increased primarily due to income from the increased J&F Guarantee, acquisitions, capital expenditure and lease indexation. Adjusting for income from the Mooral orchard in the prior corresponding period (sold December 2020), property revenue increased by $3.8m, or 12%.

Earnings were largely driven by income generated by the Group and positive revaluations on cattle properties. The prior corresponding period included a gain on sale of assets of $32.5m, primarily attributable to the Mooral almond orchard.

Operating and portfolio update

In August 2021, RFF completed an Entitlement Offer raising $100m to fund the development of 1,000 ha of macadamia orchards, purchase an 8.3 GL water entitlement, and additional asset acquisitions. In November 2021, the acquisition of three cattle and cropping properties totalling 33,926 ha (including 33.2 GL of water entitlements) and two mature macadamia orchards totalling 475 ha were announced. The acquisitions are forecast to contribute to 2H22 revenue.

Development of ‘stage one’ of the macadamia orchards, being 1,000 ha in Maryborough, Bundaberg and Rockhampton, is on track to be materially complete in FY22. Discussions with several institutional investor lessees are occurring.

In February 2022, Australian Agricultural Company (ASX: AAC) entered a 10-year lease of cattle properties Comanche and Homehill. AAC also have a backgrounding arrangement that applies to other RFF cattle properties. The arrangement enables RFF to earn income from the properties during their initial development phase before leasing.

Rural Funds is well-positioned to grow. They are well diversified with 69 properties across five agricultural sectors (almonds, cattle, cropping, vineyards and macadamias). 

The below factors make a compelling case for RFF:

  • Quality lessees and counterparties: 78% corporate and listed entities.
  • Long weighted average lease expiry profile: 9.2 years.
  • Balance sheet capacity: gearing within 30-35% target range.
  • Structured rental growth: CPI and fixed indexation and market rent review mechanisms.
  • Material development pipeline providing organic growth: productivity improvements and conversion to higher and better use. They are expected to generate earnings growth in future years.
  • Established track record: Distribution per unit growth of at least 4% p.a.
  • Experienced management: RFF has experience developing and operating agricultural properties in all sectors of RFF leases assets and has 25 years of experience as a specialist agricultural fund manager.

Outlook

Rural Funds will focus on two strategies within the portfolio that seek to increase earnings for investors. Firstly, the conversion of assets to higher and better use, specifically within the macadamia sector. The second strategy, improving the productivity of natural resource assets, is being deployed on existing cattle and cropping assets within the portfolio.

Following the announcement of acquisitions during the period and the increase to the J&F Guarantee, forecast FY22 AFFO was increased to 11.9 cpu. RFF announced FY23 forecast distributions of 12.20 cpu (including franking credits), representing a 4% increase on FY22.

Our detailed earlier report can be accessed by clicking here.

Recommendation

Rural Funds continues to make the right moves to grow its asset value and income potential. The first half has been good, with RFF making significant developments to its portfolio. Acquisitions are also poised to bring growth in FY22.

The management has an excellent track record of delivering, and they are now focussing on two strategies to boost earnings and, therefore, dividends. The forecast is positive, with dividends set to grow by at least 4% once again. We continue to recommend investors to “Buy” Rural Funds Group.

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