By Paul Daniel - Commitee Member GPA Training at Grain ProducersAustralia
See the original article here.
The family farming structure is the most common structure in the Australian grains industry. Successful family businesses are hard working, understand the vagaries of seasons, pass on skills and experience through the generations, are good capital managers who accept low returns on capital and understand business risk. The cornerstone underpinning the family farm is capital gains on land.
An interesting comparison to the family farm is the 2018 listed Duxton Broadacre Farms limited. Duxton own 21,445 Ha across 4 properties located at Forbes, West Wyalong and Naracoorte along with 8779ML of water entitlements and raised capital at $1.50 per share. Like many family farms on the east coast of Australia, Duxton has experienced drought with three consecutive statutory losses to June 2020. Like the family farm the cornerstone underpinning the Duxton balance sheet is capital gains on land with NAV per share increasing over time - 2017 $1.59, 2018 $1.69 2019 $1.71 and most recently June 30 2020 $1.75
The elephant in the room for Duxton is their share price at June 30 2020 was $1.05. Effectively the market is discounting NAV of $75.3m by over $32m, with Duxton having a market cap of $42.9m at June 2020. For shareholders who participated in the capital raising at $1.50 it would be frustrating knowing the capital gains on land has occurred over time but they cannot access the gains. The market rewards income streams and after 3 years of losses the market is punishing losses. Even now with a promising harvest expected where Duxton operates, they continue to be discounted heavily from NAV.
The challenge for Duxton is can they reflect the value of their assets in their share price? With three consecutive droughts, no dividend stream and a significant market discount to both the capital raising in 2018 at $1.50 and NAV at June 2020 $1.75 the challenge will be significant. The way forward to deliver value to shareholders would no doubt be front of mind for their independent Directors.
Ultimately the family farm might be the partner Duxton needs - get out of the risky part of the business, get access to machinery at marginal costs, lower their corporate costs, deliver the market something they understand, lease out land to good family operators at 3-5% and enjoying solid capital gains over time. Or perhaps simply liquidate the properties and deliver value to shareholders. So family farm or corporate, I think there is room for both if well run and understand who they serve.