Macadamia Orchard Completion And Tech Upgrades To Shape Future Prospects Amid Margin Squeeze

Key Takeaways

• Macadamia orchard expansion and new technology integration could enhance revenue and improve margins by reducing production costs.
  
• Debt refinancing, interest rate hedging, and asset leveraging could stabilize expenses and bolster net earnings through improved cash flow.
  
• High gearing and market challenges, including volatile macadamia prices and flat asset expectations, pose risks to Rural Funds Group's financial stability and growth prospects.

Catalysts

An agricultural Real Estate Investment Trust (REIT) listed on the ASX under the code RFF.

• The continued development of macadamia orchards, set to be completed by year-end, is forecasted to contribute significantly to the FY '25 revenue stream. This expansion is poised to enhance the group's revenue base with higher growth potential from these natural resource assets.
  
• Integration of new technology in agricultural operations, particularly through the collaboration with Inform Ag, is likely to improve productivity and efficiency across macadamia orchards, which could positively impact net margins by reducing production costs.
  
• Strategic refinancing of debt facilities and increased interest rate hedging could stabilize and manage future interest expenses, potentially leading to improved net earnings by mitigating the risk of interest rate fluctuations.
  
• Upcoming leasing agreements and the potential partial sale of assets are aimed at reducing operational exposure and leveraging existing assets further, which could improve cash flow and thus bolster net earnings.
  
• The anticipated rent increases from property lease renewals, particularly on cattle properties, could contribute to revenue growth and support the broader earnings profile of the company.

Rural Funds Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rural Funds Group's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 74.0% today to 56.1% in 3 years time.
• Analysts expect earnings to reach A$66.0 million (and earnings per share of A$0.17) by about February 2028, down from A$83.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$120.2 million in earnings, and the most bearish expecting A$46.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from 7.6x today. This future PE is lower than the current PE for the AU Specialized REITs industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Rural Funds Group Future Earnings Per Share Growth

Risks

• The valuation decrement in vineyards suggests ongoing challenges in that industry, potentially impacting overall asset valuations and future net asset values.
  
• Cash earnings or adjusted funds from operations (AFFO) were slightly below guidance due to weather-related CapEx delays and lower cattle prices, which could reflect risks to maintaining or growing earnings.
  
• High exposure to macadamia developments, contributing significantly to revenue, poses a risk given volatility in macadamia prices, which can affect AFFO and revenue diversification.
  
• Increased gearing to 37% due to CapEx, compounded by challenging agricultural market conditions and interest rate impacts, could heighten financial risk and affect net margins.
  
• Market expectations of flat asset values due to interest rate cycles and commodity prices may limit future growth in net asset value and could hinder share price appreciation.

Valuation

• The analysts have a consensus price target of A$2.222 for Rural Funds Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.5, and the most bearish reporting a price target of just A$1.91.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$117.7 million, earnings will come to A$66.0 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of A$1.62, the analyst price target of A$2.22 is 26.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.