Sunday, January 26, 2014

An oddball: Sugar Terminals Limited

Have you ever heard of the Australian National Stock Exchange?  I hadn't either until Dave Waters mentioned that I should take a look at a little company that trades on the exchange, Sugar Terminals Limited (SUG.Australia).  He thought I might be interested because the company trades at close to 60% of book value and pays a 10% dividend.

The company owns and operates wharfs and sugar terminals in Australia.  Their terminals were originally owned by the Queensland Government until they were privatized in 2000.  As part of the privatization ownership passed to sugar growers and millers, and a new corporate entity was formed to manage the terminals.  The company has two classes of stock, G shares for growers and M shares for millers.

When investors talk about companies that have economic moats I doubt they're thinking of Sugar Terminals Limited.  Sugar terminals must be a commodity business right?  A competitor just needs to build a dock further down the shoreline and charge less.  The company's results would suggest otherwise.  From 2000-2010 the company earned A$441m in revenue, and A$212 in net profit, all of which was paid out as dividends.  A 48% net margin is impressive, especially for a company selling at 60% of book value.

The reason for the company's discount is also their source of strength.  The company restricts trading in shares to sugar millers and sugar growers and related industry participants.  Their website has a list of criteria that an individual or company must satisfy to be allowed to trade in their stock.  If a shareholder ceases to qualify the company notifies them and they are required to sell their shares within a certain period of time.  If the shareholder doesn't sell their shares the company takes them and gives the shareholder their cash value.  I have no idea how the company policies their policies, or knows who active growers or millers are.

A company that's owned by its customers isn't completely uncommon.  A company that's owned by its customers and has an active trading market for the shares is very unusual.

Shares trade on the Australian National Stock Exchange, which appears to be the Australian version of the US pink sheets.  The stock trades for A$.65 a share and trades about eight to ten days a month.  The company's stock price has barely budged since 2009, yet since then they've paid out 50% of their share price in dividends.

If a market is made efficient by informed buyers and sellers Sugar Terminals is the exception to the rule.  Shareholders are active and extremely well informed participants in the sugar market.  They know the supply and demand dynamics, know the size and quality of harvest beforehand, and are privy to what might be considered inside information.  Yet with this sizable advantage the shares still trade at a depressed valuation.  The shares barely trade on price at all.  It's as if the market is only a means to exchange interests between owners.

Even though I don't meet any of the qualifications for ownership outlined in the company's FAQ I still attempted to trade the stock.  I contacted a broker in Australia with the hope of opening an account and purchasing shares.  I was informed that they don't open accounts for foreigners.  It's worth mentioning that I identified myself as an American.  Many (most?) financial institutions worldwide have begun to refuse to do business with Americans because of costly compliance the US government is trying to enforce worldwide.  It might be possible for a Canadian, or Brit to open an account without a problem.  I also inquired of only one broker, the only one that allowed online trading.  I don't have an interest in opening a full service brokerage account in Australia to hold one position.

Even though I haven't been able to find a way to purchase shares I still enjoyed reading the company's annual reports, especially their Chairman's annual letters.  The company is clearly run for shareholders, both in that the business services their needs, but also financially.  Management is concerned about costs and was able to replace their warehouse's roofs for less than they had initially estimated.  I can't remember the last time I read a press release where a company announced a project that came in below cost, usually it's the opposite.

I enjoy finding and reading about oddball companies like Sugar Terminals Limited even if I can't always invest.  Companies like this remind me that there probably exclusive ownership opportunities available to me that I might not know about or take advantage of.  Examples could include membership interests in local businesses, ownership in a co-op, or ownership in local teams.  Many of these mutual-esque holdings have characteristics similar to Sugar Terminals Limited, they are efficient, have high margins, and pay out significant dividends.  Sugar Terminals Limited might be off limits to most of my readers, but I'd be willing to bet that most if not all readers have something similar they could become a part of that they might not be aware of.

13 comments:

  1. Nate, why try to buy the stock if you didn't meet the qualifications for ownership?

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    1. I'm not sure how the company polices ownership, I thought maybe I could slip under the radar.

      My thought was shares are easy to police in certificate form, but if they're in book entry form online then maybe that's another route into ownership.

      If there were a way to buy shares I'd love to own a piece of this company.

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  2. Interesting article. Thank you.

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  3. I'd like to hear more about the similar investment opportunities we all have available to us locally. What do you mean by that? What might be some examples?

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    1. Sure, the first example I can think of is an opportunity I have to buy into a local company at 2x earnings if I want. This isn't a public company, and the opportunity is limited to people with certain qualifications, but it is available. This isn't a family company either.

      Second are local co-ops, you often receive a dividend of some sort back as part of your ownership. There are a number of companies I've seen that when you buy a share you receive dividends in-kind. An example of this is buying into a local winery, you might receive a few cases of wine as a dividend each year.

      Another example of a co-op is Mad River Glen Ski Area. Shareholders receive discounts on certain items as part of their ownership.

      A quick google of "co-op" brings up a variety of businesses like this. I know in the Midwest there are farm co-ops that purchase machinery together and share things like silos.

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    2. if u Berkshire share , u can get discount on Geico

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  4. It sounds like this is pretty much equivalent to a 10% bond with no maturity date. If they paid out 1/2 the share price over 5 years (2009 - 2013), the current yield is 10% and the share price hasn't moved much, then it seems like the dividend hasn't grown much either.

    If you have the time/money/interest, buying interests in private companies can be very rewarding. I bought a stake in a private business 3 years ago, worked to help turn it around (only reason I bought it...but buying a passive investment in a well-managed business is the same deal), and received dividends last year that were higher than my purchase price. You can often buy interests for >10% yield. You have to trust management though, as these private companies are truly illiquid and being a minority shareholder isn't for everyone (something I'm finding out now).

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  5. Hi Nate I enjoy reading your blog. I live in Australia and have never heard of this other stock market. Anyhow, I logged into my online broking account and there was no code for this company. So I suspect it is very restricted more akin to a coop.

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  6. Interesting... From their recent annual report:
    " The NSXA market provides a facility for trading securities with special requirements, as only active cane growers can hold ‘G’ class shares.
    To buy or sell ‘G’ class shares an order is placed with a stockbroker of the NSXA. Buyers are
    required to lodge a declaration of their active grower status when placing an order."


    Key is the last sentence... Would love to see if they actually follow the above process...

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  7. One similar market in the US involves agricultural LLCs/coops (Google "ag stock" and you'll find brokers--maybe just the former Alerus Ag Stock?--who facilitate trading). These tend to be ethanol refiners, with some sugar refiners and miscellaneous others; they trade, literally, by appointment, and pay out their earnings/cash flow, if they have any (this is volatile--many have been crushed and haven't paid out anything in years, though if they resumed paying out at the same clip as in good times many would yield 20%+ at current prices). One advantage is that many are SEC-reporting entities and also provide supplemental newsletters, so you really get a sense of the businesses. I spent a day reading up on them last year and decided there were better opportunities elsewhere. But still interesting...

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  8. p.s. some of these stocks do restrict themselves to growers/processors and have a "delivery requirement"; others are open to all.

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  9. I've eyed this one longingly for years, never got up the courage to try and circumvent the grower requirements, though. I wonder if you could just buy an acre in North Queensland and grow a few canes each year?
    BTW, as the numbers for Sugar Terminals suggest, I don't think the competitive situation is as simple as building a competing terminal down the way. Firstly, the growers have long established relationships with the entity and farmers tend to be fairly loyal folk. Perhaps more importantly, 5 of the 6 terminals are located onshore from the Great Barrier Reef. I suspect it's a difficult place to get approval for such developments these days. That could be a decent part of the moat.

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  10. Nate,

    I'm writing from Sydney, Australia.

    A few years ago, there was quite a lot of corporate activity in relation to sugar milling companies in Queensland, particularly with companies being acquired by Chinese interests. Possibly, this kind of thing may be a catalyst for Sugar Terminals.

    However, this may work the other way too. One of the Chinese takeovers attracted much criticism from sugar cane growers after the deal was completed. That experience may cause the current board of Sugar Terminals not to want to change the restrictions on share ownership.

    More generally, over the years, there have been occassions where some of these smaller NSX-listed companies have changed their structure so as to "graduate" (as it were) to the main Australian Stock Exchange (ASX). Probably the best recent example of that is Capillano Honey which moved to the ASX quite successfully.

    However, agricultural co-operatives down here are notoriously conservative and resistant to change. Another factor is that, among farmers, there tends to be a deep suspicion of "city" investors trying to make a buck out of agribusinesses. Also farmers have strong lobbying organisations, which have a lot of pull in political circles.

    All these factors were seen at play in the recent debacle surrounding the proposed takeover of Graincorp (which was an ASX listed company but originally started off as a grower co-operative). The transaction was bitterly resisted by various farmers even to the point of costing them a lot of money.

    Against that background, I personally wouldn't bet on Sugar Terminals changing it's structure anytime soon.

    Cheers,

    PS. I'm currently looking at a small local company called Scantech - I'd be interested to see your thougths on this one.

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