PrimeAg is set to list on the Australian Securities Exchange in mid-December after also conducting a retail offering that is expected to account for 10%-15% of the total deal.
The offering, which was arranged by ABN AMRO Morgans, Grange Securities (a subsidiary of Lehman brothers) and Southern Cross Equities, comprised 150 million shares that were sold at a fixed price of A$2 each. At that price, the stock is valued on par with net asset value.
According to a source, the book was high quality with pretty much all long-only funds and a good mix of Australian and international names. About 40 investors were said to have submitted orders during the two-week roadshow.
PrimeAg is set up almost like a fund with the intention of investing in quality Australian agricultural land and attached water entitlements. The aim is to take advantage of the increasing demand for mainstream soft commodities such as wheat, barley, chickpeas, sorghum and cotton.
And observes say the company has timed its IPO well as the worst drought in Australian history has added to a global supply shortage of soft commodities at a time when the consumption in developing markets like China and Indonesia is increasing steadily. The result is significant food price inflation, as seen in China where the latest data out this week showed that overall consumer prices increased 6.5% in October from a year earlier û matching the 11-year high from August. Food prices jumped 17.6%.
In a recent research report looking at the global agricultural sector, analysts at Credit Suisse argued that food price inflation is likely to remain elevated for the next three to five years, until supply growth can catch up with demand. They hedge this by saying that it is by no means certain that the supply will catch up, and note that despite the strong increases over the past two years, food prices are still 15% below their 30-year average.
ôThere are structural issues afoot here and agricultural production is simply not growing fast enough to meet demand,ö the analysts argue, referring to declining inventories of grain as a sign the world has had trouble keeping up with demand in recent years. Notably, demand is no longer coming just from food producers, but from biofuel producers as well.
These are issues that the backers of PrimeAg are well aware of and, in a preliminary listing document distributed to prospective investors, they say they believe there will be ôfavourable movements in soft commodity prices over coming years".
They add: ôThe board expects that sustained increases in soft commodity prices will lead to an improvement in operating profit and the potential for capital gains in the underlying value of land holdings.ö
While the company hasnÆt specified any actual numbers, sources say the objective is to achieve investment returns large enough to rank among the top 20% of agricultural properties in Australia.
Clearly, soft commodities is a risky and volatile business to be in, but the fact that PrimeAg is backed by Australian agricultural personalities Peter Corish and John Stewart appears to have convinced investors that this company has real potential. The highly experienced operators definitely have the experience and skills to build a solid Australian agricultural company and their investment strategy of combining hubs of farms within close proximity to one another, with a plan to spread these hubs over a 1,200 kilometre area from New South Wales to Central Queensland, appears to make the most of an economies-of-scale approach while reducing climate risks.
PrimeAg will also produce a diverse range of commodities and have the ability to shift between them in response to rice movements or weather changes.
ôA lot of people see this as a concept stock because it is untried,ö notes one observer. ôWhen you have this kind of model, it really is down to the management and peopleÆs perception of it û and these guys are top tier.ö
Corish has worked within agriculture since 1973, is an ex-president of the National Farmers' Federation and currently owns and operates 7,000 hectares of irrigation land, 3,000ha of dry-land farms and 5,000ha of grazing land. Aside from committing to lead PrimeAg as chairman for the next five years, he will have a strong personal interest in the performance of the business as he has injected two of the three seed properties that the company will hold at the time of listing. As a result of this injection he will hold between 2% and 3% of the company at the time of listing. The rest will all be in public hands.
CorishÆs stake will gradually increase, however, as management fees will be paid in stock rather than in cash to ensure that the management team remains committed to the task.
Stewart runs his own agricultural consultancy firm providing agronomic and business advice to 50 farmer clients and has been involved in the agribusiness for more than 20 years. At PrimeAg he will be chief executive officer.
Also helping to support the investor confidence is Roger Corbett, who will take up the positions of deputy chairman and non-executive director. Corbett retired as the head of Woolworths last year but will continue to do consultancy work for the retail giant until 2011. He also sits of the board of the Reserve Bank of Australia.
Aside from the three seeded properties, which have a combined value of A$37.9 million, PrimeAg also has options to acquire another 10 properties with a combined value of A$45.3 million, which it intends to bring on board immediately after the listing, subject to final due diligence. After paying for these, and deducting the cost of the listing, the company will have A$201.5 million left for future land acquisitions. It will also have a lot of flexibility to leverage up as it doesnÆt have any debt at present.
While PrimeAg says it intends to pay an annual dividend of 40%, investors were said to have bought into the deal based on total return expectations. And given the current volatile environment, one or two investors may also have taken comfort in the fact that the correlation between agricultural commodity prices and share prices on the ASX is not that strong.
ôYou cannot really have stable yields with agricultural properties because of droughts and other things. So this is pure capital growth,ö one source says. ôItÆs like a fund but without the cash management fees as basically all the fees are paid in stock. People like this as it means the guys have skin in the game.ö
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