What follows are my brief notes on the 2012 financial statements and MD&A. I am still reading through the filings and going through all the details, but what follows are my initial reactions.
The Balance Sheet
Looking at the balance sheet on a year-over-year basis, CRP saw a drop in current assets of $33.4 million (mainly accounted for by decreases in cash [-$17mm], investments [-$7.7mm], due from brokers [-$8.2mm], and inventories [-$2.8mm]). Where did all of these funds go?
- $15.3mm went to Property Plant and Equipment.
- $13mm went to liability decreases, mainly:
- $14.7mm of debt pay down (long-term debt, repurchase obligations, and bank indebtedness).
- $5.4mm is accounted for by a drop in equity. This further breaks down as:
- $4.1mm in share buybacks. Because CRP is buying back shares below book value, it actually bought back $6.3mm worth of “book value” stock, with the difference ($2.1mm) being allocated back as retained earnings [in essence, CRP made money from buying back its own shares if you believe book value is a good proxy for economic value].
- A $1.3mm full year loss (net income of -$3.8mm plus a $2.5mm foreign exchange gain).
The Income Statement
I already delivered the punchline above – CRP lost $3.8mm in fiscal 2012. This works out to -$0.25 per share.
Despite a positive tone in the annual report and MD&A, as well as what seems a loss of “only” $0.02 a share in the quarter, this is masking what was truly a horrendous 4Q. Without factoring in finance income of $2.2mm, we see a gross margin of 2% on the operating business. Compare this with 21.5% in 3Q12 and 11.8% in 2Q12. Is this some sort of capitulation? Management is certainly building it up as that as they cite a host of positive catalysts in fiscal 2013 with the removal of the Canadian Wheat Board (an untapped production source for Riverland’s grain terminals), a return to contango in key futures markets (easier for merchandisers to extract storage profits), and a strong start to the northern U.S. and Canadian small grain belts (Riverland lives and dies on inventory turnover – witness 2012’s low capacity utilization and ensuing poor financial performance).
Management is also – for the first time that I’ve seen – making a big deal about Stewart Southern Railway. This is an 81 mile (interestingly, a Canadian company talking about distance in miles, not kilometers?) short-line in south eastern Saskatchewan that runs from Stoughton to Regina. CRP holds a 25% interest in SSR. The line is benefitting from an oil boom in the area, as well as a lack of pipelines to carry the oil – making rail the best logistical alternative. As I mentioned last quarter – I continue to view CRP’s rail interest as a nice call option for the company.
The Statement of Cash Flows
Cash Flow from Operations grew by $15.8mm, but most of this ($13.1MM) came from changes in non-cash working capital accounts. If we want to think about Owner’s Earnings, this first step is taking net income and adding back depreciation/amortization. This would be -$1.1mm (-$0.08/share for fiscal 2012).
Cash Flow from Investing was -$9.7mm, but the most interesting part of CFI was the $16.4mm capex spend. The overwhelming majority of this ($12.8mm) went into buildings and silos/elevators. $3mm went into land. I’m a little disappointed that management didn’t give at least some color on where these funds went (we know they purchased the Manitowoc facility and have been doing some needed updates on other facilities) – making it difficult to determine just what is “maintenance capex.”
Without a good estimate of maintenance capex, it’s tough to determine a good owner’s earnings number. For my analysis, I’m going to assume that depreciation/amortization is equal to maintenance capex, so net income is a good proxy for owner’s earnings is a good proxy for free cash flow.
Cash Flow from Financing was -$23.1mm. The biggest issue here was the swap of repo obligation into long-term debt, the general paydown of debt, and the share repurchases.
Bottom line
There was very little we didn’t already know / expect in the annual financials of CRP. We knew it was going to be a bad year (well, maybe we didn’t know how horrendous the 4Q would be). We were fairly positive that NCAV would continue to erode as management invested those assets lower on the balance sheet (PP&E).
What came as a surprise, at least to me, was how much stock management bought back in fiscal 2012 (they spent $4.1mm – equivalent to an almost 5% net payout yield at today’s price) and how upbeat they are for the short-term. They are certainly hanging their hats on the break-up of the CWB, as well as specifically pointing out the return to contango on the futures market and the strong early growing prospects for northern tier production areas.
At a premium of only ~8% to NCAV, with the potential for increasing market penetration (CWB break-up), strong growing conditions, recent industry consolidation (Glencore for Viterra, Marubeni for Gavillon [Marubeni already owns Columbia Grain]), and a still healthy balance sheet, I continue to like the long-term prospects for CRP at these levels. I am maintaining my position, and will become more accumulation minded on any pullbacks below NCAV.
One last item – still the biggest issue facing CRP, in my humble opinion, is the dual management structure. A low margin business in a commodity industry cannot sustain the SG&A expense of maintaining two management teams (Riverland Ag and Front Street Capital). This is a key factor to watch going forward.
Full Disclosure: Long CRP
Harvest Investor © 2012. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.
12 comments:
Thanks for providing this update. I hope your readership grows and you continue to share your ideas with us. You provide a level of detail and organization at the right level of abstraction that is rare in this superficial age.
Comments on Ceres:
- Your initial analysis of Ceres focussed on the income statement: briefly I think it concluded that if Ceres could invest all their sizeable cash stockpile in new capacity and if they could operate at peak EBIT/bushel going forward it might be a $9 stock earning 10% ROI. Since then the cash has eroded without appreciable increase in capacity and as you also noted earlier the open market price of grain elevators has probably increased given the Viterra deal. So plan A has to be going in the ditch for them.
- The tone of the MD&A seemed to be: "well, the worst is behind us." Is it? Why will Q1 be any better? I doubt operations will improve until Q2 and if all goes well Q3 might be back to healthy levels. But even at healthy levels this company wasn't exactly a gold mine.
- In terms of the portfolio, it got a boost this quarter as Ecosyntetix rallied in Q4 ($1M.) That is gone now as it tanked again.
- I concur with your comments about dual SG&A. I have concluded I would like to own Riverland if I could, but not Ceres. For the last two years since the Riverland deal, Ceres management has not closed any substantial deals with their large cash stockpile (Manitowic deal excluded as it was an abandoned facility). Basically they have been paid over $6M to manage a pile of cash.
- I would not mind so much but for four years I was told that Ceres was going to be building a behemoth corporation, issuing debt and preffs to finance large acquisitions, none of which happened. I wonder if psychologically Front Street is viewing their management fee as a 10-15% coupon on their own initial investments and are minimizing expense (effort) on this project. Probably an unfair commentI know but what can we conclude with inaction?
- Of note in the MD&A was the comment: "Management is also working hard to expand and diversify Ceres’ emerging commodity logistics division, with several initiatives in the very early stages of development." Division? What Division? Ceres is really Front Street managers working on this when they have time, and two hird consultants (Detlefsen and Muir.) I am guessing that Ceres is exploring other businesses because the grain elevator one is not panning out. They take great pains to isolate Riverland as a standalone company in the financial statements. Perhaps to facillitate a future sale?
- I wish they would get some analyst coverage and a quarterly conference call in place so I am not making wild guesses about what is going on.
- finally, after owning since the IPO, I now go long and short based on some metrics. Right now I am short.
Thanks very much for your time and effort looking at this company.
Just FYI for anyone interested.
Ceres, (through its wholly owned subsidiary Corus Land Holdings Corp)bought some land near the southern Saskatchewan border a couple of quarters ago. They made no announcements and only made passing reference to it in the quarterly earnings report as a late quarter land purchase.
Corus recently received an exemption to build a "facility" on this land.
https://secure.farmland.gov.sk.ca/admin/orders/decisions/Corus.pdf
Corus has been quite secretive with the locals as to their plans, which has led to some speculation (some speculation is quite bizarre.)
Anyway it is not on the Stewart Southern Railway I am pretty sure. It does seem to be near a railway that crosses the border. It is in grain and oil country. So the best speculation is a grain handling facility of some sort for the expected movement of Canadian Wheat South, or to facilitate oil by rail from the Bakken area, like what Stewart Railway is doing with Crescent Point Energy. Or maybe both, as the exemption alludes to other facilities possibly being built.
So maybe it will be good for anyone "Long". "Really Long", because this company seems to take forever.
Just as an update to the management commentary, the contango in futures that indicated more grain in storage has evaporated with the ongoing drought. No grains are currently priced to account for significant storage costs.
As far as the impact from Canadian Wheat Board changes, I can say that as a member of the Minneapolis Grain Exchange, I have seen zero positive impact on membership prices due to increased trading/storage of the Canadian wheat crop.
But CRP is still attractive at the price, IMHO. So are MGEX seats.
Thanks for the info Tinbox.
FYI - on the plan for Southern Saskatchewan, here are more details:
http://www.oxbowherald.sk.ca/Living/Community/2012-05-26/article-2988995/Proposed-grain-loading-facility%3A-RM-of-Enniskillen-sells-property-at-Northgate/1
It seems curious that the article indicates that Ceres through Corus bought $20M worth of land.
I don't think the financials have reflected a purchase of this magnitude yet (unless there is a new mortgage buried somewhere or if it is off balance sheet through Corus) so I am guessing that the deal closed in Q1 and will show up on the balance sheet when Q1 Financials are published in the next week or so.
Definitely staying short.
Love the comments; and they might prove to be right on the mark.
Only one comment might be totally unfounded by Anonymous on Aug 2/2012
"It seems curious that the article indicates that Ceres through Corus bought $20M worth of land."
However; I don't see any evidence that the $20 million figure is true or was ever reprorted or ever mentioned by anyonyone except "Anonymous".
Corus Land Holding Corp now has title two miles of property along the 49th parallel and virtually every one of the "hundreds" of lots in Northgate SK. That property is included in the basically contiguous full section of land upon which the townsite was situated (less the CNR railyard, railbeds, small Canada customs lot; and I expect a Pioneer elevator and its rail tracks; and maybe a single property owner holdout. There has been no mention of municipal development permits, rezoning or actually transferring all the current currently streets and lanes associated with the townsite.
The Farm Land Security Board exemption requires building permit approval within slightly over the next half year; and there is a new zoning bylaw scheduled along with a $60,000 value Community Development Plan. Much remains to be done and there is next to zero oversight by the public, press or apparently municipal or government entities. I mean how often does a non Canadian entity pick up a "complete" townsite that has one of the three rail connections to the USA between Winnipeg and Alberta)
Multiple twenty-five foot wide undeveloped private lots were acquired by Corus Land Holding Corp for $57,000 each. The adjacent 150 plus municipal lots were picked up for less than 1% (yes that is one percent or $500 each). No advertising; reluctant delayed announcement etc.
And the secrecy and lack of public disclosure has been mind boggling.
Google Corus Land Holding Corp, check out agriville.com. Search for Northgate posts for further comments and speculation; since thats about all you can go on when there is no further information willingly provided.
Thanks for more info on Ceres plans for the grain handling facility in Saskatchewan. I apologize for inferring the $20M land value. That is clearly wrong.
Also, Ceres is a Canadian corporation, headquartered in Toronto, the executives are Canadian, the Board of Directors are Canadian, it trades on the TSX, and most of the IPO shareholders were Canadian. Yes the Riverland subsidiary is mostly (but not completely) in the US, but it is more a case of Canadians owning US assets, than vice-versa.
I sincerely hope their plans work out well for people in the region.
Harvest Investor - looking forward to future posts from you...when shall we expect more? Always looking for great stock analysis - thanks!
Sorry for the delay in posting. Hoping to have something up in the next week or two - just haven't been finding anything worth writing up lately. I did add an RSS feed to the blog (see right hand column) so you can subscribe and know exactly when I upload my next post.
Another quarter reported last week. Probably doesn't merit much analysis unless Spike is wanting to?
- If Tinbox is around and reading this I would be interested if he thinks this comment from the news release is baloney, given his earlier post: "The Minneapolis spring wheat futures market has seen rapidly expanding volumes and open interest as the market factors in Canadian supplies and the trade uses this futures contract to hedge its spring wheat positions."
Lots of Rah-Rah about the CWB and Stewart, and hinting at the plan for a grain handling facility or something.
Things I noted from the MD&A:
- Net Loss for the quarter $(4M). Largest loss this year by far.
- Net loss came largely from $(1M) loss on 0perations, and loss on portfolio (Ecosynthetix mostly.)
-Shareholder equity was propped up a bit by NCIB share purchases and $US-$CDN currency exchange.
- The scariest thing I noted was Cash and Portfolio has fallen in six quarters from $64M to $35M. In that time Ceres has only made one acquisition - the Manitowic abandoned malt factory for I think $9M. Maybe the Stewart acquisition as well for I think $2M. Beyond that the Operations losses and Portfolio losses, and Capital expenditures have really depleted the war chest.
-Despite these losses the shareholder equity seem to be holding up somehow ($10.61 per share)
- PP&E has increased in 5 quarters from $57M to $73M so they are investing, I just don't see where they are investing, and if it ultimately means increased capacity.
- Well, I am short, they lost $4 million dollars this quarter, and the stock didn't budge.
Whatever. Good luck to the longs.
Q2 Earnings are out.
http://finance.yahoo.com/news/ceres-global-ag-corp-announces-220000941.html
No good news. Still losing money. Burning cash. Not much success rebuilding inventories. Canadian Wheat Board deregulation is not yet generating much business for them.
Announced a "strategic review" of certain Riverland Ag assets (i.e. "FOR SALE.")
Interestingly Ceres has not renewed its normal course issuer bid. It expired in mid-October, and there have been no insider purchases since:
http://www.canadianinsider.com/node/7?menu_tickersearch=CRP+|+Ceres+Global+Ag
This tells me a couple of things:
1. they probably want to conserve cash to do something else with it, and/or
2. they probably don't believe anymore (as the market doesn't either) that their own (inflated?) book value of their assets is a reflection of their actual economic value. Especially given the income (or lack of) generated by these assets the last two years.
Maybe the NCIB is in the process of being approved, but if it isn't it will be very interesting to watch the stock price with the recent bad quarters, terrible guidance going forward, and tax loss selling on the horizon.
The only reason you approach the Sask Farm land Security board is if you want non-residents to be buying more than 10 acres of Sask farmland. That was the very first step taken back a year and a half ago when Corus approached the Board and was granted an exemption for up to 9 quarters of land. There were some strings attached; including getting municipal development permits in place by April/ 2013 (which is about like tomorrow as there still isn't one sniff of public notice to ratepayers).
So I say Corus isn't just a bunch of Canadians; and neither is their parent company Ceres. They are fronts.
Thats not to say that anything and anything wasn't rubber stamped in the municipal sale of essentially the Northgate townsite. Buying a town isn't regulated; and apparently certainly doesn't have to be advertised either.
The night light has been turned off so no more power bills to pay (according to municipal minutes..) And the RM did get about $500 per lot (less school taxes owing and paid for by the ratepayers. There remain substancial acreage in streets; lanes and her majesties holdings that council promised to deliver as quickly and completely as they could; but not a trace on that front. So far the Estevan Mercury published one little blurb; and an Oct/2012 article in the Western Producer that were based about 105% on my rearch and comments from before all parties were sworn to secrecy in whatever this development may morph into.
Next to no one on agriville.com grasped the significance; but only lately has a theory of stategic Chinese land purchases; their workers etc. to staff the "mines", loading facilities of all kinds etc. because of insufficient/unwilling Canadian workers; potash reserves near Milestone (Lewvan areas) and the CNR rail bed that still remains ready to be rehabilitated to connect Lewvan to Northgate. And look at the old rail network to see how Stewart Southern rail could be connected with a relatively few miles of track.
This province is ready to be turned upside down; and we're on the exponential growth curve. Young farmers are becoming concerned about not being able to be competitive in purchasing; while older ones are smacking their lips. Such is life and its ramnifications.
And it may very well not include the grain terminal that Corus might have hinted was their major intention. As for the other possibilities; it may be none of anyone's business; just as one councillor quite bluntly has pointed out. And as the reeve did say " He could do anything that he chose to do"
Ask yourself if 9 quarters of land and a townsite are needed for a grain terminal.
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