Johnny’s Real-Life Acquirers Multiple Portfolio – Month 4 – Part 2

Johnny HopkinsStocks1 Comment

This is part 2 of month 4, for Part 1 click here.

Stock purchase #8, March 2016.

OK, now let’s take a look at this month’s (March 2016) second pick that I’m adding to my portfolio.

Next in The All Investable Stock Screener this month is Brasilagro Cia Brasileira De Propriedades Agricolas (NYSE: LND). As you can see from the chart below, Brasilagro’s share price has done ok in the past 12 months, up nearly 13% in that time:

(Source: Google Finance)

How does it look in the Screener?

Let’s take a closer look at Brasilagro in the “All Investable Stock Screener”.

The company currently has a market cap of $181 million, while its Enterprise Value (EV) is $151 million.

The reason for this EV is because the company has an excess of $30 million of cash and cash equivalents once you subtract its total debt. As an acquirer, we subtract this $30 million from the current market capitalisation of $181 million, which leaves us with a total EV of $151 million.

The company’s operating earnings, which are taken from the top of the income statement, are $55 million.

In other words, we’re paying $181 million for a company with an EV of $151 million, that is returning operating earnings of $55 million on that $151 Million.

This gives us an Acquirer’s Multiple of 2.78, when we divide the EV ($151 million) by the operating earnings ($55 million).

Who is Brasilagro?

Brasilagro is a company based in São Paulo, Brazil.

The company focuses on acquisition, development and exploitation of agricultural land that it believes possesses significant potential for cash flow generation and value appreciation. The company seeks to transform this land through cultivation of high value-added crops and periodically sell the newly developed land in order to generate profits.

What’s the problem for Brasilagro?

At face value, there doesn’t appear to be much wrong with Brasilagro. In the company’s latest 2015 annual report, which ended June 2015,  it stated revenue of US$45 million, a 32% increase from the previous corresponding period (pcp).

The company also reported net profit of US$46 million, which was also up significantly on the pcp, due largely to a ‘Gain on Sale of Farms’ of US$50 million.

Brasilagro has done an awesome job of converting land into profits.

Here’s a typical example from the latest annual report.

It’s to do with the Cremaq Farm transaction:

On October 2006, the Cremaq farm was acquired by its subsidiary Imobiliária Cremaq with a total area of 32,702 hectares for R$42.3 million.

At the time of acquisition, 3,000 hectares were cultivated with grain production. Since the acquisition the company had invested R$26.0 million (net of accumulated depreciation) in infrastructure to support the production process, including the construction of a silo at a total cost of R$8.4 million with capacity to store 72,000 tons of grains (such silos are capitalized under property, plant and equipment).

During the planting season for the 2014/2015 crop year, Brasilagro planted 14,965 hectares of soybean and 3,750 hectares of corn at the Cremaq farm.

On May 10, 2013, the company sold 4,895 hectares of the Cremaq farm, 3,201 of which are arable, for a total sale price of R$37.4 million, equivalent to 901,481 soybean bags.

On June 10, 2015, the company sold the remaining 27,745 hectares of the Cremaq farm and related assets, 18,578 of which are arable, for a total price of R$270.0 million.

So, where’s the problem?

This is a typical example of a good company affected by its geographical location.

The Brazilian economy has been experiencing a slowdown – GDP growth rates were 7.5%, 3.9%, 1.8%, 2.7%, and 0.1% in 2010, 2011, 2012, 2013 and 2014, respectively and GDP decreased 1.9% in the first six months of 2015.

Inflation, unemployment and interest rates have increased more recently and the Brazilian Real has weakened significantly in comparison to the U.S. dollar.

In addition to the recent economic crisis, protests, strikes and corruption scandals, including the “Lava Jato” investigation, has led to a fall in confidence and a political crisis.

There is strong popular pressure and several legal and administrative proceedings for the impeachment of the Brazilian President and/or revocation of the mandates or resignation of the Brazilian President and/or the Head of the House of Representatives, which have led to uncertainties.

The economic and political crisis have resulted in the downgrading of the country’s long-term credit rating from Standard & Poor’s rating agency from BBB + to BBB-, placing Brazil back to speculative investment grade level (“junk”). Moody’s downgraded Brazil from “Baa2” to “Baa3” and changed the negative perspective to stable, while Fitch Ratings downgraded Brazil from BBB to BBB- and changed the perspective from stable to negative. Both Moody’s and Fitch still consider Brazil investment grade.

Low Volume

Another important issue surrounding the company is simply that it has such low trading volumes. For the entire month of February 2016, the company only traded 34,300 stocks. While this is great for individual investors, it makes it difficult for institutional investors to get involved.

So, with all that said, now let’s take a look at their numbers:

Acquirer’s Multiple – 2.78

P/E – 2.54

P/B – 0.82

P/S – 1.66

Based on all of these numbers, the company certainly does look cheap.

How safe is the business?

To figure out the stability of the company, we use a number of key metrics.

Its Altman Z-Score is 4.61 – indicating it’s in the Safe Zone.

Its Piotroski F-Score is 8 – indicating the company’s financial situation is stable.

Its Beneish M-Score is -1.67, indicating that it may be an accounting manipulator.

Details of the trade:

I have $300 Australian Dollars to allocate to each stock in my portfolio.

The AUD/USD Exchange Rate this month is USD$0.75.

Therefore, I have around USD$226 to allocate to the company.

I purchased 72 shares on March 24, 2016 @ Market for $3.10.

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One Comment on “Johnny’s Real-Life Acquirers Multiple Portfolio – Month 4 – Part 2”

  1. Johnny, your posts have been so exciting to read! Thank you for starting this and allowing viewers to follow you through this process. It has inspired me to go and purchase Toby’s book and start investigating this a bit more! One thing that stands out to me is that you say you have ~600AUD (~457USD) to contribute each month. That amounts to 7200AUD (~5483USD) per year. The cost of the annual subscription is $500USD, which makes your expense ratio ~9%, excluding fees and transaction costs. Are you anticipating returns greater than 9% this year? Even as you continue to add to your portfolio in later years, and the expense ratio of the subscription cost vs portfolio value drops, there are still low cost ETFs which would potentially provide you with greater returns. I am struggling with initiating an annual subscription to the Acquire’s Multiple for this reason. What am I missing?

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