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Date : 11/09/2020

Rural Funds Group (ASX : RFF)

ASX :

RFF

Market Cap : $771.46 Million

Dividend Per Share : $0.028

Dividend Yield : 4.80 %

Buy

52 Week Range : $1.565 - $2.280

Share Price : $2.28

A stable firm with good past performance and revenues forecasted to grow. However, the stock is trading at a 52-week high and we believe it will be subject to some degree of volatility given the uncertain economic climate. We issue a “Hold” recommendation for investors already exposed with a long-term strategy.

Company Analysis

Rural Funds Group (RFF) is a Canberra based Trust, that owns agricultural real estate across Australia and leases them to counterparties. RFF generates its revenues through lease payments and appreciation of the market value of its assets over time. Hence, it is a real-estate fund manager. Its assets include diversified commodities such as orchards, cotton, vineyards, etc.

RFF has been active in market – looking for potential acquisitions to increase their assets and seek long-term revenue growth. The firm aims to increase distributions by 4%p.a. through its operations.

In FY2020, RFF has generated 78% of its revenues from listed tenants. The firm currently owns 61 properties across 5 sectors. The weighted average lease expiry – a metric to calculate how protected the assets are from vacancies is 10.9 years, a sign of strength.

The firm’s exposure to different agricultural sectors by revenues and leases is explained with the below chart.

Source: RFF

Company Updates


Source: Tradingview.com

The stock is currently trading at its 52-week of $2.28. After the market slump in March 2020, stock has recovered remarkably – fuelled by positive revenues and earnings for FY2020, the firm’s strategy to re-align its portfolio towards growth assets by acquisition of new properties that produce commodities that are of strategic importance to Australia’s export market.

The firm has sold assets in poultry and almost and acquired cattle, cropping properties and macadamia orchards. The picture below shows us how investment opportunities affect income and growth.


Source: RFF

The re-alignment of RFF’s strategy towards growth can be seen from the chart. The diversification should reduce its reliance on almonds – that accounts for 45% of its current revenues as seen from the segmented revenue chart earlier in the report.

The firm has increased its debt facility to $400m to fund the Maryborough properties that is acquiring, and a further $50m for future acquisitions.

Industry Analysis

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.

Investment Thesis

Rural Funds Group announced a positive report of its earnings and operations in FY2020, especially given the uncertainties in the current economic climate.

The Net Income increase by 38% for FY2020 from the previous year – ending the year at $44.6 million. There has been a steady growth in income the past 3 years for RFF since the drop in 2018 – which was mainly due to the increase in operating expenses. Since then, the income statements produced by the firm has seen a balanced growth across all metrics. EBITDA margins have remained stable as well – indicating the stability in the performances of RFF’s assets.

The balance sheet is where RFF can flex its muscles. Considerable growth in real estate assets. FY2020 however, saw a dip of 1.75%. We believe this is due to the changes in market value of agricultural real estate given the market uncertainties and economic impact of the pandemic.

The firm is in perfect shape and has positioned itself well to withstand any uncertainties. FY20 report shows Total Assets exceeds its total liabilities by 2.5x – suggesting a healthy long-term financial outlook. The firm’s assets have historically performed well, and RFF has always maintained higher assets to liabilities – an indicator good of past performance. The capital structure has remained almost unchanged the past year. The firm maintains a debt capitalisation of 37.8%, and equity capitalization of 62.2%.

The most recent dividend paid out by RFF was 2.82 cents for every share at a dividend yield of 4.8%. These dividends are not franked and hence are subject to tax.

Recommendation

To sum it up, RFF is a firm with history of good past performance, revenue growth, re-aligning its portfolio to focus on growth, a good mix of debt and equity in its capital structure, and a healthy dividend yield of 4.8%. The firm is forecasted to grow, albeit at lower growth rates as is the case with this industry. The stock, however, is trading at its 52-week highs. While the real-estate market will not be as affected as the stock market, the long-term economic impacts due to the pandemic may cause some degree of volatility. Hence, we issue a “Hold” recommendation for long-term investors who are already exposed to the stock.

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