Saturday, August 4, 2012

There is something sweet with this fruit company

Kiwis are great, every New Zealander I've met has been friendly and likable.  Oh did you think I was talking about the fruit?  Well the mistake is understandable, when most of the world hears "kiwi" they think the fruit not the people.  This is good news to Satara Cooperative a kiwi and avocado company located in…New Zealand!  Not only are the company's products delicious the company has a lot going for it as well.

I stumbled on Satara as I marched through all 141 New Zealand listed companies in the IRG New Zealand Investment Company Yearbook.  I've found some of the best stocks going through lists from A-Z looked at everything.  For some reason New Zealand has appealed to me, it seemed like a forgotten market living in the shadows of Asia and Australia.  This impression was reinforced when I received the yearbook and saw that of the 240 pages 141 were New Zealand companies and 99 were Australian companies.  The investment yearbook has a page per company with company history, some financials and the current year outlook.  While I'm no expert on New Zealand just going through each company gave me a feel for the NZ market.  I didn't find any net-nets, but I did find some companies with interesting potential.

A little insight into my process, as I went through each company I marked companies I wanted to research further into a notebook with a small note or two.  I made notes to follow up on 30 companies.  Of those ultimately I expect 3-5 to be investment worthy.  For Satara I made the following note: "EV/EBITDA 2x, P/B .29x".  One company I already invested in and reviewed was Guinness Peat Group.

Quick Thesis

Satara Cooperative is extremely cheap on an asset basis, an operating earnings basis, and relative to the other large kiwi fruit company in New Zealand.

Note all dollar figures New Zealand Dollars (NZD).
  • Book value of $1.55 per share with a last trade at $.45
  • EV/EBITDA 2.22x
  • Debt has been reduced from $22m in 2007 to $6m in 2011
  • Lumpy earnings over the years, but earnings before special items of $.15 in 2011
  • Management is open to unlocking shareholder value by putting to vote a merger offer from Seeka Kiwifruit which was rejected by shareholders (rightfully so, it was a lowball offer).


Background

Satara Cooperative is an agricultural company with facilities located across the North Island of New Zealand.  The company packages kiwi and avocado, they also lease and manage 790 acres of kiwi canopy (320 hectares).  A grower who joins the co-op can decide what level of interaction they want with Satara from complete land management to just packaging and shipping of fruit.  Since the company is a cooperative growers share in a portion of profitability.  I'm not 100% certain, but I believe growers are higher in the capital structure than shareholders.  The company is listed in New Zealand under the ticker SAT.

The problems

When I see a company trading at a large discount to book value I wonder if book value is justified.  And if book value is reasonable, why isn't the company trading near it?  This is another way of asking  why is the stock cheap?

In a past post I highlighted how one or two numbers can be a pivot point for an investment.  In the case of Satara the pivot numbers are fruit loss, and trays packed.  Fruit loss is the measure of how much product is lost between the purchase from the grower and export.  The difference in fruit loss can mean the difference between profit or a loss for the year.  Fruit loss for the industry is volatile, and Satara's fruit loss is even more volatile.

Trays packed was in the 12m range before dropping to 9.3m in 2010.  The number of trays packed has recovered to 11m, but there are dark clouds ahead.  There has been a kiwi vine disease (Psa-V) across New Zealand putting pressure on growers.  I found estimates online that expect the kiwifruit industry to lose up to $885m in 2012, this is a daunting number.

So why is this stock cheap? The company has a spotty past of efficient operation and is in an industry with an uncertain future due to disease.  Agricultural diseases can do terrible things to industries.  In the US in the early 20th century the southern cotton industry was wiped out by the boll weevil.  Of course the decimation of the Southern cotton industry led to the rise of the peanut industry since peanuts weren't susceptible to boll weevils.

Is it worth book value?

To me this is the million dollar question with Satara, is the company worth book value?  If the company is worth book value purchasing the stock at this price would result in a ~4x gain, quite respectable.  Determining if a stock is worth book value breaks down to two pieces, earning power, and book value composition.

I have a term I use on this blog to identify stocks where earning power and book value support each other; a two pillar stock.  The idea is if a company has earning power equal to or in excess of book value then the company's book value is justified and the shares should trade at least at book value if not above.  If a company's earning power is consistently below book value then book value might not be a reasonable value, or a justifiable value.

Looking at Satara from a two pillar perspective the company is interesting.  They certainly have the potential earning power, but there are strong headwinds.  In 2010 the company lost $4.8m, and $214,000 in 2011.  Clearly results are improving.  The 2011 annual report shows that core earnings without one time subtractions would have resulted in $.15 per share.  If the company were to earn $.15 a share at a 10x multiple book value is easily supported.  The question is can Satara execute on this level?

Looking at straight book value the answer is much clearer, book value appears conservative and mostly devoid of intangibles.  Most of the company's assets consist of biological assets (kiwi and avocado), a small amount of cash and a large amount of PP&E.  For an agricultural operation the large PP&E is expected, it consists of growing land, warehouses, packing plants, machinery and other necessary equipment.

The company had their assets re-evaluated this past year in light of the Psa-V outbreak.  The Psa-V can wreak havoc on the kiwi vines and the company wanted to ensure the carrying value of their assets was correct.  At the end of the assessment the company marked down their assets by $4.9m due to the likely affect of the Psa-V.  It's worth noting that the Psa-V didn't have a very large affect on operations in 2011, but it could potentially have an impact which led to the writedown.

Satara's largest competitor is trading at .45x book value with a EV/EBITDA of 4.81.  Both companies face the same uncertain outcome from Psa-V.  Both companies grow kiwifruit in the same area of the country, and if Seeka is being valued at .45x book value I would expect Satara to be valued at least in a similar manner.

Conclusion

Satara appears to be on the right track, management is focused on profitability and paying down debt.  If the company continues to execute as they plan, and Psa-V isn't as harmful as some expect there is a lot of potential upside for this stock.  Satara has all the signs of a lucrative turnaround stock, and the potential to buy in before shares are valued higher.  It is worth noting here that a New Zealand value investor is on the Board of Directors and has been pushing for more transparency and for management to realize shareholder value.  Looking back through old annual reports the investor has made large strides on transparency, and it's hoped value realization as well.

Talk to Nate about Satara

Disclosure: No position





3 comments:

  1. Just a thought (I know nothing about the company) but currency may be another issue. A lot of ags in Austrailia (e.g. wine exporters) have been having a lot of trouble due to strong AUD. Maybe NZ is a similar story, although maybe the kiwi/avacado market has some idiosyncracies I can't imagine. Just an idea though.

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  2. I imagine that some of the relative valuation discount arises from the shareholder structure (transactor shares and investor shares, plus the 10% cap on investor share ownership).

    Since Satara listed it is basically never traded above book. It listed in 2004 around book value, and has basically been running downhill since!

    Chris Swasbrook has been in this since at least 2007 - his letters to the Satara board can be found at http://www.elevationcapital.co.nz/insights/letters (I assume you know this Nate, but it might be interesting for other readers to see the extent of his efforts).

    Best
    Jonathan

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    1. Jonathan,

      I have emailed with Chris some, and read his letters on their website. I think having Chris on the Board makes the difference between this as a potential investment vs a company to pass on. Management seems to have done everything they can to keep it cheap, hopefully Chris' prodding can move it up to full value.

      Nate

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