Rural Funds Group (RFF AU): Issues to consider
|
February 2020
RFM proudly announced that they won their court case against Bonitas. We note that it was undefended, no-one appears to have disputed RFMs evidence and it mostly deals with legal wording. We feel the key issues in our report have yet to be addressed. RFM is structuring rental agreements that lift asset values which generates higher fees for RFM to receive higher fees than if values were lower RFM structured the J&F deal to achieve an economic benefit using RFF shareholders money RFM has a different agenda because its ownership is different to RFF RFM is using creative accounting to book profits that exceed economic cashflow. This enables dividends to be paid in excess of real cash generation. This supports the share price, which then facilitates stock issuance to replenish the balance sheet. None of these were in anyway challenged or disabused in the ruling November 2019 RFM have recently filed their accounts with ASIC. These accounts reveal that RFM loses money farming, it is highly levered and the group breached its covenants several times in 2019. It looks as if it would collapse without support from RFF's unitholders. We are seriously concerned that RFF unitholders do not understand the risks they are taking investing in RFF For regulatory reasons, we cannot release our research to the public. However, to ensure investors are not ill-informed we have recorded a summary video and we suggest you ponder the following. Asset values 1) RFF assets are valued based on rental yields 2) RFM and various related entities account for over 50% of rents 3) RFM makes more money from fees and revaluations than it pays in rents, so it has an incentive to pay excess rents which lift valuations RFF debt guarantee 1) RFF unitholders are paying RFM a fee for the privilege of underwriting RFM's debt 2) RFM is highly levered and could collapse due to a) margin calls, b) extra farming losses or c) asset volatility 3) There is ia circular risk. RFF depends on RFM which depends on RFF Poultry sale 1) The asset was sold at a discount to book value BUT no mention was made of the fact that RFF will effectively be paying out RFP AO unitholders as well. Deduct this from the headline sale price and the discount rises 2) In the sale, it was noted that the assets were at the end of their life. What had happened to care and maintenance capex? Are other assets being similarly under maintained 3) RFP was one of the largest sources of rent. How will that be replaced 4) What would valuations look like if the other assets were valued using a similar capitalisation rate Related party transactions 1) Why does RFM report such a large income from rendering services, but there is no mention in RFF's accounts? Please remember, investors need to do their own due diligence. These notes should not be taken as investment advice. 23 September 2019
We believe today’s comment on our work by RFM was disingenuous and failed to address the questions we posed. For regulatory reasons, we cannot release our research to the public. However, to ensure investors are not ill-informed we are providing some background to our conclusions and explaining why we think their responses are hard to justify. Please remember, investors need to do their own due diligence. These notes should not be taken as investment advice. |
Background material
Supporting documentation- key passages highlighted
E&Y report Retail offering RFF AU FY 2019 accounts Please contact us, if you would like to become a client and get a full copy of the report. |
|
Background In August, Bonitas Research accused Rural Funds Group (“RFF”) of fraud and asset inflation. We have had a look and are very concerned. Criminal fraud is hard to prove, but we see a clear cut case of financial engineering and creative accounting being used to inflate asset values and line the pockets of the management company, (“RFM”). Issues to consider JBS deal
Assets
Profit and Loss
Valuations
|
Important
This note is written with the sole purpose of highlighting some issues we think are important.
It is not a recommendation to BUY or SELL any of the securities mentioned and should not be taken as such.
Readers should form their own opinions about the company and seek appropriate advice.
Please read the Bucephalus disclaimer.
This note is written with the sole purpose of highlighting some issues we think are important.
It is not a recommendation to BUY or SELL any of the securities mentioned and should not be taken as such.
Readers should form their own opinions about the company and seek appropriate advice.
Please read the Bucephalus disclaimer.