Bucephalus Research Partnership - Exposing Creative accounting and Fraud
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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.

​
Bonitas ruling
Background material
RFM AR 2019
Kaizen letter
E&Y investigation
RFM rebuttal

Rebuttal 23 Sept 2019
Key passages highlighted

​
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
  • RFF issued units to guarantee a loan that enabled RFM to get the equity in J&F for free. RFF has the downside, RFM the upside.
  • RFM is effectively charging a fee on a credit instrument that helps RFF
  • JBS Brazil has a history of corporate malfeasance

Assets
  • RFM gets paid on based on the value of RFF's assets and is therefore incentivised to grow these as fast as possible.
  • Capitalising costs increases the value of the assets
  • Plant (ie almond trees, vines etc) valuations depend on how long they are expected to live
  • The valuation of Water rights is subjective
  • Management fees are rising as a % of revenue because revenue is not rising in line with asset values

Profit and Loss
  • Capitalising costs reduces operating expenses and lifts profits
  • Reducing depreciation helps boost profits. Extending the estimated life of any asset, eg an Almond tree, will reduce depreciation.
  • If profits are higher than cashflow, distributions cannot be funded using recurring cash generation and must be funded from elsewhere

Valuations
  • Management uses a DCF model to value the property based on their accounting methods not open market transactions
  • Cutting discount rates and lifting pricing assumptions boosts asset valuations, irrespective of underlying cashflow
  • The independent valuers, rarely visit the underlying properties. Instead, they base their valuations on management models



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.
Bucephalus Research: Exposing Creative Accounting

   Email: research@buceph.com    Telephone: +852 3464 0990 
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