With Australia’s water markets an election issue, we would be remiss not to provide an update and our view on one of Australia’s largest water rights owners, Webster’s Ltd (WBA). WBA is the combined Tandou entity, chaired by one of Australia’s most experienced business people, in Chris Corrigan, who stepped down from the booming Qube Holdings group to focus on this sector.
At last report, WBA holds just over 150k mega litres of water rights across the eastern Seaboard, but primarily in the Murray Darling Basin; noted by James Dunn as Australia’s largest water region. The group has operations across the east of Australia, including Tasmania, with around 20,000 irrigable hectares of property at any one time under management or ownership. The groups biggest crops are in cotton, walnuts and almonds, with livestock including lambs a growing share of their business. The company has the ability to produce as much as 180,000 bales of cotton each year and currently delivers 90% of Australia’s annual walnut crop (that’s some sort of monopoly). Yet by far the company’s largest asset is it’s substantial water rights holdings which are carried at a book value of $162m on their balance sheet but which many experts believe are worth in excess of $350m at the present time. Given WBA’s market capitalisation is just $545m, the horticultural and agricultural assets nearly come for free to shareholders.
WBA was caught up in a 4 Corners report in 2017 which made allegations regarding the company’s water use, ownership and intentions following the purchase of the Tandou cotton farming properties in NSW and the associated water rights. Such was the coverage of the report that management saw fit to put out a press release, highlighting in their words ‘fabrications’ and lack of research undertaken in this ‘hack job’ by the ABC. Effectively, the reporters and several land owners were suggesting that Webster’s had breached various obligations regarding its use, storage and ownership of water. The company stands by its stated goal, which is to ‘own a wide range of water entitlements……and convert these entitlements into more valuable horticultural and agricultural products’.
WBA is coming to the close of a period of transition, which began when the company decommissioned the cotton farm operations at Tandou, due to concerns about the availability of water from the Menindee system, and converted the property to livestock farming of lambs.
The group also sold another cotton farming property, Bengerang, for $132m in 2018, to a series of private investors and pension funds. This and more recent decisions to purchase further almond and walnut orchards in the Riverina district in NSW has seen the company sharpen it’s focus on the region where they have the greatest competitive advantage. For the 12 months ending 30 September 2018, the company remains reliant on the Agricultural division, which included cotton, wheat and livestock, for $153m in revenue and $43m in profit, and the Horticultural division delivering $53m and $10m in profit respectively. Unfortunately, comparisons to previous years offer little value to the substantial land sales and change of strategic direction that have occurred.
Whilst some may question the best use of limited water in Australia, there is no doubt that cotton, almonds and walnuts offer some of the great return on investment for farmers particularly in export markets. The walnut orchards alone deliver a profit margin of around 20%, with WBA delivering the second highest yields on record in 2018 and selling prices increasing 17% globally. As with all agricultural businesses, there was some weakness in the 2018 crop due to non-pollination events, however, management’s recent decision to divest a number of non-core properties has allowed them to continue to invest in further plantings, as well as purchase additional and surrounding properties. The company’s walnut operations, which are vertically integrated, are one of the few Australian monopolies still available to investors to take part in.
Where many agricultural investors go wrong, is in over-leveraging their business and not maintaining sufficient diversification of their income. WBA is well placed on both areas, first, their gearing ration is just 28.5% after using the sale proceeds to reduce debt, and secondly, their income is spread across annual crops, like cotton, and perennial crops like walnuts and almonds, which once producing provide a consistent income. This has more recently been complemented by a move to increased livestock capabilities following the purchase of 50,000 hectare property for lambs at Backpaddle. Following the recent transactions, PSP Investments, a global pension fund, own some 19% of the property, and Chris Corrigan himself 13%; this provides important support for further capital raisings and asset purchases.
In our view, the change in direction of WBA comes at an opportune time and offers an excellent entry point for investors. The company trades expensively on a Price-Earnings ratio of 30x, however, this is muddied by the combination of a transition year for the company’s finances and the fact that some 60% of the company’s shares are owned by insiders. Continued improvement in 2018-19 operations, which have been highlighted by management should see earnings grow strongly in the years to come.
We believe some level of valuation premium is reasonable given the monopoly position in walnuts and the large water, relatively high security, water entitlements. Outside of BlueSky’s Water Fund, which trades at NTA but offers limited liquidity, WBA is one of the few true water investments left in Australia. We believe the company will continue on its expansion into perennial crops where is has a competitive advantage and is likely to do through further capital raisings. The strategy being undertaken is not unlike that of Harvard Endowment, which has spent many years buying up pristine Napa Valley property in order to take ownership of the water located underneath. For this reason, we would not be surprised to see further pension fund interest in the company’s assets. Given Qube Holdings strong turnaround, we would not expect someone like Chris Corrigan to walk away to waste time in WBA unless he sees real opportunity in the sector.
It’s a buy for us.