NZL - NZ Rural Land Co IPO
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
NZ Rural Land Co Financial Forecast
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.