Rural Funds Group Beefs Up Growth Outlook

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Cattle in, poultry out as Rural Funds Group firms up its growth outlook, with property-related income exceeding forecasts in the first half.

-No assets materially impacted by drought or bushfire
-Deploying capital to improve productivity
-Rental review process commencing and likely to be favourable
 

By Eva Brocklehurst

After a busy first half, in which Rural Funds Group ((RFF)) sold its poultry assets and acquired six cattle properties, brokers assess the outlook is firming up well. The net impact of transactions undertaken during the first half have improved both the growth outlook and tenant covenants.

Related party conflicts are reduced along with associated market concerns. Moreover, no assets have been materially affected by drought or bushfire, which provides confidence in the company's agricultural investments.

First half revenue was up 18% to $38m, while the distribution was in line with Bell Potter's expectations at 5.42c. Distribution guidance for FY20 is 10.85c per unit, rising to 11.28c in FY21. Property-related income rose 20% and exceeded forecasts, while net debt fell.

The broker points out, since 2016, Rural Funds Group has invested around $268m in the cotton and cattle sector and is intent on deploying capital to improve the productive capability of the assets. Bell Potter believes this should be a catalyst for further favourable revaluations and rental reviews commencing in FY21, providing a five-year tail in rental income growth.

There is also an upcoming meeting of shareholders to approve an extension to the J&F guarantee, to $100m. If approved, Bell Potter suggests adjusted free funds from operations (AFFO) in FY20 are likely to lift around 5% to 14.2c per unit. AFFO guidance for FY20 is currently 13.5c per unit.

Cash conversion pleased Wilsons, along with the revaluations, and with positive rent reviews validate the longer-term appeal of moving capital into cattle and out of poultry. Positive revaluations were received for macadamia orchards and cattle properties during the first half.

Productivity improvements were much in evidence, as the company booked a revaluation gain on the Natal cattle property aggregation with an implied value uplift of around 17%. This was broadly consistent, Wilsons observes, with that achieved on the Rewan cattle property in June 2019. The broker makes modest upgrades to forecasts and retains an Overweight rating with a target of $2.19.

Gearing is 26.4%, with sufficient capacity to settle remaining acquisitions and explore future opportunities, UBS observes. The broker, with a Buy rating and $2.30 target, adjusts estimates downward by -4-6% for FY20-22 to reflect the sale of the poultry assets, offset to some extent by the cattle acquisitions.

The company, a listed agricultural real estate investment trust (A-REITs), has a portfolio of almond orchards, vineyards, cattle, cotton and macadamia assets. Bell Potter, which has a Buy rating and $2.38 target, notes the assets are some of the most productive in the industry and boast high-quality tenants including Treasury Wine ((TWE)), Select Harvests ((SHV)) and Australian Agricultural Co ((AAC)).

Caveat: So as not to be unfair to analysts, note that above ratings and targets were set prior to this week's stock market washout and thus may be subject to review, albeit fundamentals should remain unchanged at this point.

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