As appealing as I find Anglo Eastern Plantations (OTC BB: AEPLF.PK), I can't buy it for my Rising Star portfolio. First, though, the appealing part.
Face it: Our cheapest dinner dates are behind us
Things like floods, harsh winters, cyclones, and earthquakes (let's group all that as "bad weather") have sent food prices through the roof in the past year. But bad weather is just a proximate cause; slowing crop yield improvements, higher biofuel demand, and the rise of a meat-craving emerging middle class mean that food prices, though volatile, are headed up.
That means the value of farmland is heading skyward as well. Farmland generates cash flows according to the prices its output fetches in the market. Higher food prices mean higher cash flows and more valuable farmland.
So I should buy a farm?
It's difficult for most people to invest in farmland. I wouldn't recommend those uninitiated in things like soil analysis, crop rotation, and drainage systems buy a plot directly. Most of us would rather buy stock in a company that owns farmland. Unfortunately, we have few choices. The big farm equipment players are publicly traded -- think Deere (NYSE: DE ) and Caterpillar (NYSE: CAT ) , which are both up strongly in the past year -- but most large plots of farmland are owned privately and change hands infrequently. Among the few publicly traded owners, the farmland usually accounts for only part of the company's value -- for example, Argentinean Cresud's (Nasdaq: CRESY ) farmland accounts for scarcely more than half its enterprise value.
How about a plantation?
Imagine my excitement, then, when I stumbled upon Anglo Eastern Plantations, a company that buys, develops, and operates farmland in Indonesia and Malaysia. Anglo Eastern's agricultural product of choice is palm oil, which, though lesser-known in the U.S., is a big deal internationally. And even though these farm assets are in developing countries, the company itself is headquartered in London, and running through the company's filings and chairman's letter tells me that this is no fly-by-night operation.
How much for that Indonesian palm oil farm?
Anglo Eastern runs a tidy business, generating $56 million in cash flow last year. But forget cash flow for a moment. Let's look at the company's land.
Anglo Eastern owns 133,000 hectares of farmland. Of that, 52,000 hectares are currently planted, 75,000 are plantable, and the remaining 6,000 are unplantable, which means they end up used for things like barns and mills. The company is currently planting about 10,000 new acres a year and accumulating new land even faster than that -- East Anglo's land holdings have tripled in just four years.
So what is a hectare of planted palm oil farmland worth? Here's a back-of-the-envelope look: Anglo Eastern yields about 17.5 tonnes of fruit per hectare. Take out the cost of farming it, and the hectare's value varies with the price of palm oil. Based on palm prices over the past half-dozen years (and the trend has been decidedly up), a hectare of palm oil farm is worth between $4,500 and $9,000.
That's a wide range, but considers this: Even using $4,500, Anglo Eastern is slightly undervalued. Using the $9,000 (based on current palm oil prices) makes Anglo Eastern's farmland alone worth twice the company's enterprise value. And that's before taking into account the value of the company's mills and its business processing other farmers' palm crops.
But ... (You knew it was coming)
Despite a market cap just shy of $500 million, Anglo Eastern's shares are devastatingly illiquid. U.S. investors are looking at the company's Pink Sheets listing (ticker AEPLF). The Pink Sheets exchange has no market makers, so your trade order doesn't get executed until somebody enters a reciprocal order. Many days (for example, the day I'm writing this), shares don't trade at all. Not one. U.K. investors, or those with access to foreign exchanges, have a marginally better option. Shares are also listed on the London Stock Exchange under the ticker AEP, where they trade the equivalent of about $125,000 a day. That's better than the Pink Sheets listing, but still not very liquid.
Illiquidity means three things:
- It can take a while to acquire shares in the amount desired.
- Small trades can swing the price wildly in either direction.
- Most importantly, it could take a long time (weeks wouldn't surprise me) to execute a sell.
The illiquidity rules it out for my Rising Star portfolio, but I still find the opportunity appealing and wanted to share the idea. I won't be buying shares for the portfolio, but if you have a strong stomach and understand the very real risks of illiquidity, this might be a play to spice up your own portfolio.
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