REA is a screaming buy at 325p

Following up my piece last week on MP Evans (MPE) and REA (RE.), here are some interesting notes on REA prepared by a friend a couple of days ago:

“It is agreed that M P Evans (MPE) will be taken over by KLK.

What I found very interesting in the results was on Page 9 ( see MPE website) where it is set out in tabular form the net equity position of the company: it works out at £11.00 a share and lists all the assets  including a breakdown of estate values ( as recently independently valued). MPE is of course speaking on behalf of the bid target.

You will see MPE has valued the East Kalimantan estates at 21000 dollars a hectare.

There is a total of 10,420  hectares valued at $21000 a hectare. Total value 221 million dollars.

All of REA’s estates are in East Kalimantan. At the end of this year REA Kaltim will have 34000 mature hectares and should have recently planted 14,000 immature hectares by the end of this year. 

Bearing in mind that DSN Plantations own 15 percent of REA Kaltim and using the independent valuation methodology that M P Evans used, the following valuation for REA is suggested: 

34000 hectares mature – valued at 21000 dollars a hectare. = $ 714 million. 14000 hectares immature but planted – valued at 10000 dollars per hectare =  $140 million. 

“Smallholder value”  $40 million.

Remaining land-bank to be planted value,  12,000 hectares. $20 million.

Total value net of 15 percent DSN ownership. $ 776 million 

To which should be added $44 million dollars for the wholly owned by Rea holdings coal and stone interests, giving = $810 million                                                                                                                

REA has debt of about 220 million dollars and $ 80 million preferred stock. So one should reduce this $810m so one should reduce total by $ 300  million dollars. There was a loss in 2016 of the order of $20m. (But that should be regarded as matched by a credit for biological assets.)

$ 810 million – $320 million = $490 million. REA has 40.25 million shares outstanding. Therefore tangible net asset value is $12 per share or 960p. 

It is reckoned that a value of $18000 a hectare would be more reasonable. However REA has currently much more land that is immature plus a landbank totalling some 26000 hectares whose values should rise to about 166 million dollars when fully mature. 

What REA needs is rising production and cash flow to complete planting programme of at least $120 million over next 3 years and 2 new mills  ($50 million). 

However MPE board is clearly defending its business against new KLK bid when it comes, which will have to be 10 pounds share or $700 million dollars to succeed.”

All this leaves REA a screaming buy at 325p. I know I have remarked upon this several times before. But it needs to be said.