Ridley's overlooked property portfolio

Australian-based agribusiness Ridley is focused on being the country's leading producer of premium quality, high performance animal nutrition solutions.

However, the company has significant property holdings, which, in our view, are being underappreciated and potentially significantly undervalued by the market.

A recap on Ridley

Ridley supplies livestock food producers mainly in dairy, poultry, pig and aquaculture. Management has also acquired two key rendering businesses in Victoria and NSW.

Rendering utilises surplus animal raw materials to create a commercial product. The process involves thermally treating animal tissues to produce sterilised products such as animal fat and protein that can be sold to pets and livestock.

Along with rendering, dairy is the other key growth opportunity with the very strong long-term outlook of Asian demand for milk products.

The company is diversified in its sector exposure balancing out the unpredictable nature of operating in agriculture. Some of these risks include weather, currency, commodity price, disease, and export markets.

Property portfolio

In addition to the Agriproducts business, Ridley has significant land holdings. The book value as of December 2014 of those holdings was $39.6m.

The property portfolio isn't simply a hidden asset that is being ignored by management but rather a reporting segment in the company's accounts. However, with negligible associated accounting revenue and small reported losses in recent years it doesn't appear to receive much attention from the market.

In recent years Ridley has been progressing with its strategy of realising the surplus land.

On April 20 Ridley announced the sale of a former feedmill site in Dandenong, Victoria for $3m. This sale price is materially higher than the property's carrying value of $670,000.

In 2013-14 Ridley generated $4.5 million of proceeds from a small parcel of land in the Dry Creek salt field in South Australia as well as an agreement to sell the former feed mill site at Dalby in Queensland.

While much of Ridley's property sales have been modest in size in recent times, the company has a number of property holdings which have the potential to realise significant value over the coming years.

This most recent sale also begs the question as to whether RIC's balance sheet appropriately values the underlying property portfolio.

The most significant of the property holdings include:

• 5,000 hectares (Ha) at Dry Creek (12 km's from Adelaide CBD)
• 475 Ha at Moolap (3 km's from Geelong CBD)
• 912 Ha at Lara (adjacent to Avalon Airport).

These are clearly significant property holdings with the potential to realise meaningful value for shareholders.

As at December 31 2014, the carrying value of the properties on the company's balance sheet was $39.6m. The recently sold feed mill site at Dandenong had a carrying value of $670,000 bringing the current carrying value of the property investments to $38.9m or $0.13 per share.

Much of the market commentary around valuation of Ridley seems to largely ignore the value of the property assets.

Furthermore, what is interesting to us is that the company acknowledges the following:

“The fair value of the sites at Lara, Moolap and Dry Creek can not be reliably determined at the present time given that the respective locations do not have local established industrial infrastructure which would enable a reliable valuation benchmark to be determined. “

“Furthermore, the value of each site also varies depending upon which stage of the progressive regulatory approvals required for redevelopment that has been attained at balance date.”

As a result of both of these factors the company's accounting policy is to carry these assets at cost.

It would seem likely that these assets have the potential for value to be realised significantly above the current value being accounted for in the group's balance sheet.

What is the opportunity?

Ridley's property strategy is to focus on generating long-term value from the more complex sites such as Dry Creek, Moolap and Lara. RIC has been attempting to add value to these property holdings through the pursuit of commercial transactions and development approvals that will facilitate redevelopment for higher end uses such as residential, commercial or industrial.

In other words, we don't expect Ridley to enter into cash sales of these larger property holdings but rather to enter into longer-term relationships to develop these properties and realise greater value over time.

Dry Creek is a salt field about 12kms from the Adelaide CBD. FY14 saw the closure of this salt field, which was a significant event for Ridley. The site comprises four sections, all of which are currently undergoing an expression of interest (EOI) process relating to potential development or use of the land. At the 1H15 result management noted positive response from the EOI process with due diligence and binding offers expected in 2H15.

It is worth noting, however, that the closure and development of a salt field such as Dry Creek is a complex process including remediation obligations and a range of government body approvals.

The outcome of the expression of interest process currently underway and the value and structure of any resultant deal is largely unknown. However, there is potential for value to be realised significantly above the current carrying value of the assets.

Moolap is a 475 Ha site 3kms from the Geelong CBD with coastal frontage. In June 2014, RIC entered into a development agreement with Sanctuary Living as partner for developing the site.  RIC is developing a master plan and feasibility in partnership with Sanctuary Living and is currently negotiating with the Victoria Government for development approvals.

Again, there appears to be clear potential for value to be realised in excess of the current carrying value of this asset.

Lara is a 912 Ha property adjacent to Avalon Airport in Geelong. Ridley has in the past run a EOI process over 650 Ha of the land. As at the 1H15 result there has been minimal activity with this parcel and it remains available for sale.

Valuation

With regard to RIC's valuation we make the following observations:

• The current book value of $0.13 per share of the property portfolio likely materially undervalues the realisable vale of the assets.
• When valuing the company on a price-earnings (PE) basis it doesn't include the value of the property assets as they are not generating any income. In fact, the current PE ascribes a negative valuation to the property business as the PE is capitalising a loss associated with preparing the assets for sale.
• Similarly, a DCF methodology either ignores or ascribes negative value to the property assets as they are currently a drag on cash earnings.

Further clarity on the Dry Creek EOI and Moolap development approval process is likely in 2015, and should allow a more informed analysis of realisable value.

Nevertheless, it is encouraging that the Dandenong site recently sold for materially above its carrying value.

We retain our “hold” recommendation pending further information on the direction of realising these property holdings.