NZL - NZ Rural Land Co IPO

[Jantar]

I have just received an email inviting me to invest in an IPO for NEW ZEALAND Rural Land Co. Looking at how it is structured I don't think I will try for any shares ahead of the IPO, But if shares were available for The Manager I would in straight away.

The Manager is entitled to fees from NZRLC, being (all GST exclusive).
• a management fee of 0.50% per annum of NZRLC’s Net Asset Value.
• a performance fee of 10% of any increase in NZRLC’s Net Asset Value per Share from one financial year to the next.
• a transaction fee of 1.25% of the acquisition or divestment value of any rural land that NZRLC acquires or disposes of.
• a lease fee of $30,000 for each lease entered into by NZRLC.

https://www.directbroking.co.nz/Dire...12bf3c6b00f86e

[Snoopy]

I have just received an email inviting me to invest in an IPO for NEW ZEALAND Rural Land Co. Looking at how it is structured I don't think I will try for any shares ahead of the IPO, But if shares were available for The Manager I would in straight away.

The Manager is entitled to fees from NZRLC, being (all GST exclusive).
• a management fee of 0.50% per annum of NZRLC’s Net Asset Value.
• a performance fee of 10% of any increase in NZRLC’s Net Asset Value per Share from one financial year to the next.
• a transaction fee of 1.25% of the acquisition or divestment value of any rural land that NZRLC acquires or disposes of.
• a lease fee of $30,000 for each lease entered into by NZRLC.

https://www.directbroking.co.nz/Dire...12bf3c6b00f86e

Buy 'Allied Farmers' then. Don't they have the management contract?

SNOOPY

[Beagle]

There should be a performance fee hurdle. 10% performance fee should only apply if the NTA increases more than the dairy farm index, in my opinion.
Getting a performance fee without reference to an appropriate measurement base (that attempts to measure the degree to which the fund has truly outperformed), seems most unreasonable to me.

[mfd]

Allied farmers (ALF) are planning to acquire 50% of the management company with an option to buy the rest at a later date. The shareholders are voting on this today.

Not a pure play on the management company but it could become a significant part of their business.

I hold ALF, not sure about NZRLC yet.

[nztx]

Allied farmers (ALF) are planning to acquire 50% of the management company with an option to buy the rest at a later date. The shareholders are voting on this today.

Not a pure play on the management company but it could become a significant part of their business.

I hold ALF, not sure about NZRLC yet.

It wouldnt be difficult looking at reduced Veal result & drought effects

That alone suggests it may put the Jan 2021 Div very much in question
and moreso, given even more shares on issue

I'm out of ALF on the recent up trend & staying away from NZRL, watching both as a spectator going ahead

Far more enticing prospects elsewhere

[nztx]

It wouldnt be difficult looking at reduced Veal result & drought effects

That alone suggests it may put the Jan 2021 Div very much in question
and moreso, given even more shares on issue

I'm out of ALF on the recent up trend & staying away from NZRL, watching both as a spectator going ahead

Far more enticing prospects elsewhere

I now see ALF Dividend has been chopped down to 1.2c from 2.0 cps (fully imputed) last year -

http://www.sharechat.co.nz/article/9...ouncement.html

From Richard Perry's Annual Meeting speech:

"I'm delighted to announce a dividend to holders of our existing shares of 1.2 cents per share (fully imputed). This dividend will not be available to any participants in the placements (including the vendors of the Management Company) or participants in our rights issue. To achieve this in the current financial year is a pleasing accomplishment, but you will note that it is lower this year to reflect the lower profit. As has been the case for the last few years, the dividend will be paid in January 2021."

[Ferg]

Sorry for the long post but I am doing the work the Directors should have done in presenting a financial forecast. TLDR : don't invest.

You may ask why the rush with this listing? IMO NZRLC is using the Government guaranteed COVID loan, likely through BNZ. I believe the Govt guarantees up to 80% of loans issued prior to 31 December 2020 on the proviso it is for new business or new capex etc. Hence the rush. I have seen this scheme being offered to another client by the BNZ.

How disappointing to see yet another prospectus with no forecast financial information. RUA also comes to mind. Surely they have done their own forecasts, so why can't they share that? In the absence of a formal forecast, here is mine.

What we know about the issue (everything in 000s unless millions stated):

Shares in existence now = 160k, issued for $200k
IP transfer 100k shares, $125k value
ALF loan assumed to convert to equity 300k shares, $375k value
Offer of 60m shares for $75m
Offer expenses $3m
Directors issued shares in lieu of payment for services 60k shares, $75k value
Debt raised $30.86m

So the financial position after the capital raise (assuming the debt facility is fully drawn down, which it must be under the Govt scheme) will be:

Cash $103,435k
Intangible Assets $125k
Term Loans -$30,860k
Nett Equity = $72,700

Which is made up of:
Issued Capital $75,775k
Reserves -$3,000k (issue expenses)
Retained Losses -$75k

Shares on Issue = 60.62m
NAV per share $1.20

Note that the NAV has already fallen from the issue price of $1.25 which raises the question of when ALF will convert their loan to equity. I can't answer that but if I were ALF I would wait until it were more advantageous to convert the loan to equity.

NZRLC have stated they are interested in dairy farms and can see 19 opportunities with 9,239 hectares. I don't know the average cost of a dairy farm but eye-balling the graph they provided suggests $30,000 per hectare is within the ballpark. So they are looking at opportunities with a value of circa $277m. That is some distance North of their minimum prospectus cash of $103m above. Some might say that is a touch optimistic.

Anyhoo, they are aiming for a 4.5% gross rental. Assuming they put circa $100m to work in acquisitions and retain $3m (for management and directors fees & capex), then they can afford to buy about 7 farms given the average price will be somewhere around $14.5m (based on their numbers). A 4.5% gross rental on $100m is $4.5m turnover per annum (7.4c per share). Given they have already identified 19 opportunities, I suspect this won't be the only capital raise.

Buying the 7 farms for around $100m will cost NZRLC an extra $1.4m in Management fees. The 1.25% transaction fee might be able to be capitalised. It will take time to get acquisitions and leases sorted, and provided they are in place by 1 April, then I'm forecasting a very small loss for FY21 of around $230k. That is after the Management Co have taken their 0.5% NAV fee of around $210k for 7 months. NAV per share end of FY21 will be around $1.20.

Year 2 is more interesting. Long story short, 7 farms leased $4.5m revenue, NPAT of around $1m after NAV fees and NAV increase fees combined of ~$870k assuming a 3% asset revaluation. After tax EPS of 1.5c per share excluding revaluations. It's no wonder they think this should be valued on a NAV basis which will be $1.26 per share (and an eye watering P/E ratio of 82). Other assumptions include 1% capex, 1% depreciation, 3% revaluation, 3% interest, directors fees & expenses $186k, other expenses $150k.

Cash generated will be $1.6m before repayments on the debt, and the NAV 0.5% fee is paid in cash. The NAV increase fee is paid in shares which means offer shareholders will be slowly diluted by the Management Co. At some point the BNZ will likely want some money back so the dividends will be capped by covenants, imputation credits and free cash flow arising after debt repayments.

I can't be bothered working our their weird measure of "AFFO". We can look at cash & profit instead plus their policy is to be Listed PIE so they require full imputation credits and RWT on dividends. Taking 80% of the pre-tax profit of $1.3m implies a maximum potential dividend of ($1.3m x 80% / 61m shares) 1.7c per share. Based on a NAV of $1.26, this gives a maximum yield of 1.35%. It's no wonder they want this to be valued on a NAV basis.

Take from this what you will but it appears the Management Co does very well out of this at the expense of shareholders. As other have said, better to invest in the Management Co with such easy fees, but I believe it is unlikely ALF will be able to acquire the other 50% of rights without paying through the nose. Now that I have gone through the process, the cynical side of me thinks the Directors know these numbers and didn't want to disclose such a miserly return to shareholders. But it is worth asking for whom do the Directors of NZRLC work?

Like RUA, I wouldn't touch this given there are better opportunities elsewhere.

I think I will stop there.

[kiora]

Thanks Ferg for all that good work
There has been a lot of these type of investments over the years and the most pertinent Q is as you say is
Who benefits?
and who is going to lease these properties ?
The $30m debt is also a major concern if not all paid back.
When/if interest rates go up the interest cover will be all eaten up by the term loan
My view is that investing in rural land is best used as a storage of wealth not a maker of wealth but that this vehicle is not suitable for this purpose given its debt and sensitivity to interest rates.

[Ferg]

TLDR: For context current SP is $1.13, float price was $1.25. Again sorry if it's a bit long but this makes me nervous due to IMO a lack of progress, lack of focus, sloppy reporting and snouts in the trough.

An update on my post #8 on 5 December 2020 - partly quoted below:

So the financial position after the capital raise [snip] will be:

NAV per share $1.20

[snip]

NZRLC have stated they are interested in dairy farms and can see 19 opportunities with 9,239 hectares.

NAV
Reported NAV = $1.208 per the interim report, so I wasn't too far out with my projection of $1.20 (~$0.5m).

Acquisitions
The prospectus stated NZL was interested in 19 farms at the time. So far nothing has eventuated but p2 of the Interim Report (IR) states: "We anticipate being in a position to announce the terms of an acquisition in several weeks". Notice this says acquisition singular, not plural. The interim report mentions that irrigation reports and soil testing takes time for large acquisitions. Personally I would have expected they were a little more advanced with their 19 opportunities in terms of some of this stuff when they went to IPO. How were these opportunities identified and/or included in the PDS if they didn't have any of this basic information? Surely the potential vendors would have had something to assist with the process? Or maybe they were pie in the sky opportunities? I suppose the big wheels do turn slowly but this feels glacial given we are now at the end of February.

Receivables
How does a company with no revenue have receivables of $116,251 per note 7? I know it's not a big number but I am genuinely curious. Has an insider borrowed money from NZL? Or has someone not paid for some shares? Note 5 states equity raised is $75,000,000 but the cash flow statement has $74,883,749 so the mystery is partly solved. Who hasn't paid for their shares? If this is an insider, should that be disclosed in related party transactions? And if it's not an insider, how do we get shares on tick? That sort of rubbish needs to be sorted before you reach the end of a reporting period so that simple people like me don't get to raise simple questions like that.

Missing Directory?
Also, where is the Directory per the index in the Interim Report? Still waiting to see if the bankers are BNZ....

Elevation Capital Management Brokerage Fees
The PDS stated "Elevation Capital Management Limited (Elevation) has entered an arrangement with the Lead Manager where the Lead Manager will, from the fees it receives for acting as Lead Manager, pay brokerage to Elevation. The amount of brokerage payable will be up to 1.5% of the aggregate value of all Applications that Elevation arranges from its investor network and are allotted."

The IR states Elevation received $747,255 in brokerage fees. Dividing this by 1.5% implies Elevation brought almost $50m of the proceeds to the table, out of $75m total. So if I am interpreting this correctly, Elevation brought around 2/3rds of the money to the table through it's investor network, and the brokers etc the other $25m. Assuming the $747k is included the total listing expenses of $2,330k that leaves a lot of money to make the PDS and raise the other $25m.

The way that note is worded in the PDS, it sounded like Swasbrook was bringing along a few mates with him and wanted to be compensated for that. But 2/3rds....really? IMO that should have been disclosed in the PDS.

Dairy / Not Dairy
The PDS was full of statements about dairy dairy dairy, milk prices, dairy land prices yada yada yada. In 54 pages viticulture was mentioned in passing 3 times:
p2: "In the long term NZRLC may acquire land in the dairy, sheep and beef, horticulture, viticulture and forestry sectors."
p8: "Our initial focus is on acquiring New Zealand dairy properties. However we intend to expand our focus to other New Zealand primary sectors, particularly as investment opportunities arise in horticulture, viticulture, forestry, as well as sheep and beef."
p45: "As it grows NZRLC intends to expand to other primary sectors in New Zealand such as horticulture, viticulture and sheep and beef."

Page 2 of the IR now states: "While our core, initial focus remains on acquiring dairy farms, we are having preliminary discussions with potential tenants and vendors in other sectors such as viticulture. This work will continue so that we are prepared to diversify into other sectors once we have established an asset base in the dairy sector."

Focus people, focus. It is too early to get into other sectors when your prospectus had a mountain of analysis on dairy. I recommend NZL stop "chasing deals" and deliver on what they said they would in dairy.

Conclusion
This makes me nervous due to IMO a lack of progress, lack of focus, sloppy reporting and snouts in the trough.

@NZL PM me if you want a professional.

[ratkin]

Just received an email too. Is this going to be listed on the main board?