Description

Coronavirus small cap investing checklist:

1.  Corporation will survive and is potentially favorably impacted by the virus        

2.  Well-managed business with competent leadership                             

3.  No outside capital needs under any reasonable scenario             

4.  Substantially undervalued on earnings and cash metrics      

5.  Meaningfully undervalued on NAV or liquidation value  

Alico Inc. is a $202MM market capitalization, $351MM enterprise value agribusiness focused on citrus production and conservation headquartered in Fort Myers, Florida.  The company owns approximately 111,000 acres of land in eight Florida counties (Charlotte, Collier, Desoto, Glades, Hardee, Hendry, Highlands and Polk) including approximately 90,000 acres of mineral rights.  The company classifies its operations into Citrus and Water Resources/Others with the Citrus business accounting for 97% of revenues and effectively all earnings. 

Alico has one of the longest, richest, and most dysfunctional histories of any company I know of.  I think it is worthwhile to cover before discussing the current fundamental and financial outlook of the business. Alico can originally trace its founding to the Atlantic Coast Railroad, which was first known as the Wilmington and Weldon Railroad, which was constructed in 1840 and was the longest railroad in the world at 161.5 miles.  The line was strategically valuable to the Confederacy and was renamed the Atlantic Coast Railroad post the war. In connection with the construction of the railroad, the company accumulated significant land holdings and in 1898 the Atlantic Land and Improvement Company (ALICO) was formed to manage these holdings.  Over time, Alico became heavily involved in agribusiness with significant growth in the 1950s. The company began developing citrus groves in addition to managing timber holdings and a cattle ranch. Alico leased land for mining and oil exploration and also regularly sold land to real estate developers as the state of Florida grew.  

In 1961, Ben Hill Griffin, Jr. was named to the Board of Directors at Alico.  He slowly grew his stake in the company and took a controlling interest in 1972.  In the 1970s, Alico was actively engaged in developing residential real estate and continued to sell non-core acreage.  At this same time, the company continued to increase their citrus land holdings and their production. In the 1980s, Alico diversified into sugarcane production and continued to grow.  

In March of 1990, Ben Hill Griffin Jr. died and his son Ben Hill Griffin III was appointed as the sole trustee to his business affairs and was named CEO of Alico.  Griffin III had four sisters who had been involved in varying degrees of the family business. The heirs had significant disagreements and litigation ensued between the four sisters and Griffin III with claims that he was mismanaging the family’s affairs and Alico.  The conflict carried on for over a decade with the matter finally going to trial in 2001. When a settlement was drafted, it called for Griffin III to receive a 40% share of the inheritance. This was not suitable to several of the sisters who wished to see Griffin removed as trustee, the trust dissolved, and to receive their “fair share” of the inheritance.  The matter carried on for several more years until February of 2004 when Griffin III signed his Alico stake over to his sisters and stepped down. John R. Alexander, one of his nephews, took over as CEO. 

In October of 2004, National Land Partners offered to purchase Alico for $55.75 per share and were rebuffed by Alexander who stated that “there was no price at which he would sell the company.”  Due to an unexpected tax burden the sisters finally sold their 50.5% stake in the company to an investment vehicle, 734 Agriculture for $37 per share on October of 2013 for $137.8MM. 734 was investment vehicle controlled by hedge fund managers Remy Trafalet and George Brokaw in conjunction with the Arlon Group, the private equity arm of Continental Grain Co.

In conjunction with the 734 stake, Alexander retired and was replaced by Clay Wilson, a “third generation citrus grower.”  In 2015, Alico completed the transformational acquisition of three citrus growers for a combined $363MM while also divesting their sugar operations.  In 2016, Remy Trafalet was named CEO of Alico and the company embarked on “Alico 2.0,” a restructuring and efficiency program with the goal of increasing the company’s ROIC to 15% and streamlining operations.  Trafalet was put on leave in November of 2018 for alleged misconduct and an attempted boardroom coup. Lawsuits were initially filed, but Trafalet permanently resigned in February 2019 in conjunction with a settlement.  CFO John Kiernan was named CEO of the company in conjunction with Trafalet’s exit. In November of 2019, the 734 group dissolved with underlying investors receiving distributions in-kind.  

The investment thesis on Alico is based on the following points:

1.  Alico is a unique set of assets with substantial value that is largely orphaned in the equity market.  Alico believes they are the largest producer of citrus in the United States and my work points to them being far and away the low-cost producer of Florida citrus.  For perspective, I believe that it cost Alico approximately $1.30 per pound solid to produce citrus in 2019 while the average producer in the state of Florida was likely in excess of $2.00 per pound solid.  The company has no analyst coverage by the street and has historically committed minimal effort to communicate with current or potential investors. There are no reasonable publicly traded comps and the stock has a long history of poor performance and a dysfunctional corporate history.  Investors have no insight regarding the nature of the citrus business or the value of Alico’s land.  

2. Alico is a very attractive absolute value with support both from an earnings and NAV perspective.  My base NAV for Alico is $58.07 assuming $8K per acre for the company’s citrus acreage and $3.4K for the company’s other ranch land holdings.  My numbers are driven by private-market comparable transactions in the counties where Alico has landholdings. This implies 115% upside. At the company’s recent ICR Presentation (the first presentation in years) the company pointed to an estimated NAV range of $47-$67 per share.  The business also trades approximately at tangible book value, a historical low. Alico is not just a “land" or "NAV” play. The business is highly profitable and generates meaningful cash. On trailing 2019 numbers the stock trades at 8.9x earnings, 7x EBITDA, with a 15% FCF yield. On my 2020 estimates Alico trades at 12.5x earnings, 8.5x EBITDA, and offers a 10% FCF yield.  

3. In addition to earnings and NAV support, there is meaningful optionality and long-term growth potential.  The three acquisitions completed in 2015 as well as Alico 2.0 have positioned the company for substantially improved financial performance.  In 2017 (pre-Hurricane Irma) Alico generated $130MM in revenues but had adjusted EBITDA of $35.7MM, a 27.5% margin. In 2019, revenues were $122.3MM, but adjusted EBITDA was $48.5MM, implying a 39.6% margin.  This is a direct result of Alico 2.0 which reduced costs by $16.3MM or 19%. The potential liquidation of Alico East Ranch as well as a water conservation contract with the State of Florida offer material upside.  Currently, Alico is marketing Alico East Ranch (25.7K acres) for $83.5MM. This land does not generate material EBIT – but a sale would equal 41% of the company’s market capitalization.  Additionally, Alico has a contract with the State of Florida to manage excess water runoff from Lake Okeechobee.  The contract largely entails diverting water to the West ranch. There are $4MM of upfront costs and Alico is to be paid $12MM annually with an expected net profit of $9MM annually.  $9MM in pre-tax profits on 7.5MM shares is a significant boost. Currently the company is still dealing with several constituencies including several water districts and the Seminole nation. While this is a fluid process, this project is in the State of Florida’s budget so it is a legitimate opportunity.  If Alico management is never able to get approval from all of their constituencies I expect them to sell the West Ranch. My NAV for their ranch land is $225MM – an 11% premium to the market capitalization of the company.  Alico has also been investing in the business.  They have meaningfully increased their plantings over the last several years with the long term goal of increasing their annual harvest to 10MM boxes.  

Business Summary:

Alico is a Florida-based agriculture business with its primary asset being 111,000 acres of land in eight Florida counties.  Alico manages the business segmented on two divisions – Alico Citrus, one of the largest domestic citrus producers, and Alico Water Resources and Other, a leading water storage and environmental services divisions.  Other operations include leases for grazing rights, a lease to a third party of an aggregate mine and leases of oil extraction rights to third parties, farm lease revenue, the generation of revenues from sod and tree sales and rental income for office space.  The Citrus business largely produces all of the profit of the company. For perspective, for 2020 I am modeling consolidated segment EBIT before general and administrative costs of $42.7MM with Citrus accounting for $41.7MM of the total

Segments:

Alico Citrus – Alico Citrus includes activities related to planting, owning, cultivating and/or managing citrus groves in order to produce fruit for sale to fresh and processed citrus markets, including activities related to the purchase and resale of fruit and value-added services, which include contracting for the harvesting, marketing and hauling of citrus.

Water Resources & Other Operations – Water Resources & Others Operations consists of activities related to water conservation, leasing of grazing rights, mining royalties and other less significant lines of business.  Also included are activities related to owning and/or leasing improved farmland. Improved farmland consists of acreage that has been converted or has been permitted to be converted, from native pasture and which may have various improvements including irrigation, draining and roads.  Alico sold its breeding herd in January 2018 but had historically been involved in cattle ranching.

Citrus

Alico Citrus groves total approximately 45,000 gross acres or 40.5% of the company’s land holdings.  It is important to note that this portion of land generates all of the company’s earnings. Alico owns and manages land in Desoto, Polk, Collier, Hendry, Charlotte, Highlands and Hardee counties in Florida.  Of the 45,000 acres that they own and manage approximately 12,500 is classified as support acreage. This includes acres used for roads, barns, water detention, water retention and drainage ditches, all of which are integral to the cultivation of citrus trees.  Alico also owns a small citrus tree nursery and utilizes the trees produced in their own operations.  

The Citrus business cultivates trees to produce citrus for delivery to the processes and fresh citrus markets.  Sales to the processed market were 97% of sales in 2019. Alico produces Early and Mid-Season variants, primarily Hamlin oranges, in addition to a Valencia variety for the processed market.  They deliver fruit to the processors in boxes that each contain approximately 90 pounds of oranges. Because the processors convert the majority of the citrus crop into orange juice, they generally do not buy their citrus on a per box basis but on a pounds solid basis.  

Alico produced approximately 46.7MM, 26.5MM, and 42.6MM pound solids for each of the fiscal years 2019, 2018 and 2017.  On a boxes basis, they delivered 8.1MM, 4.7MM, and 7.3MM boxes over the last three years. I am modeling a flat harvest for fiscal 2020.  The terrible numbers in 2018 are related to Hurricane Irma. Despite Irma being a “generationally-bad” event for the Florida citrus industry – Alico still generated $2.6MM in free cash flow.  

The average pound solids per box over the past three years was 5.91, 5.64 and 5.87 for the past three years.  Alico generally uses multi-year contracts with citrus processors that include pricing structures based on a minimum (“floor”) price with a price increase based on market conditions.  If pricing is favorable relative to the floor, they benefit. In the 2019-2020 year, their largest agreement will be under minimum floor pricing ranging from $2.05 to $2.15 per pound solid and rise price from $2.50 to $2.65 per pound solid.  Under this agreement, if the market price exceeds the rise prices, then 50% of the excess will be added to the rise price. Under the next largest agreement, the citrus produced will be at a minimum floor price of $2.60 and a rise price of $3.00.  Of note, Tropicana represented 89% of revenue for Alico. This is a very stable, long-term relationship and I do not consider it a significant risk.  

Sales to fresh citrus markets were 3%, 2.6% and 4.6% of Alico Citrus revenues for the past three fiscal years.  They produced 210K, 125K and 328K boxes of fresh fruit boxes over the past three fiscal years.  

Alico 2.0 was a program focused on taking out $20MM in operating expenses while increasing production.  The company planted over 400,000 trees in fiscal 2018 and they have stated that they believe that they can produce 10MM boxes per year on a sustained basis, even in an environment where citrus greening continues.  My model assumes flat production in 2020 and 2021 and then 8.4MM in 2022 and 9.3MM by 2023. 

Water Conservation & Other

Alico’s Water Resources and Other Operations land holdings account for approximately 66,228 gross acres or 59.5% of total acreage.  This includes 61,680 acres in Hendry County, 526 acres in Glades County, and 4,022 acres in Collier County. In January of 2018, Alico sold its breeding herd and leased grazing rights on the Alico Ranch to a third party operator.  The company continues to own the property and conduct long-term water dispersement programs and wildlife management. In total, this acreage generates minimal EBIT for the company but it appears that management is taking steps to create value through a water conservation project with the State of Florida as well as the potential monetization of Alico East Ranch. 

Alico is currently developing a 35,000 acre Northern Everglades water conservation project with the State of Florida.  Currently Alico has a contract with the state for an eleven-year contract for payment of $12MM annually and payments of $4MM for implementation of the project.  This project will retain large volumes of water from the Caloosahatchee River and prevent local runoff from entering the watershed. The project is supposed to significantly reduce excessive Lake Okeechobee releases and storm water runoff into the Caloosahatchee.  Currently, Alico has all necessary state approvals to proceed and the project is expected to be operational within one year from the start of construction, which is contingent on local and federal approvals. The Florida state budget for 2019/2020 includes funding for the project.  As noted, the primary holdup are several water districts and the Seminole Indian tribe. This contract is pure optionality as far as I am concerned.  

In addition to the water conservation project, Alico is also currently in the process of marketing the Alico East Ranch for sale.  This property contains 25,698 acres and Alico is marketing the property for $83.5MM or $3,250 per acre. This property lies 90 minutes from West Palm Beach and 90 minutes from Fort Myers.  The bottom line is that currently Alico is earning effectively nothing from 66K acres. If they are able to execute on the East Ranch sales it will generate 44% of the market value of the company. Additionally if the water project comes on line it will equate to likely $.85 to $.90 in EPS.  I am modeling the water conservation project to come on line in the third quarter of 2021.  

Financial Statements 

Alico has $150MM in gross debt and $145MM in net debt.  The debt consists of several different tranches of secured debt (with land as collateral) with Metlife and Prudential.  The blended interest expense for the loans is 4.25% and principal payments are $2.3MM quarterly. Covenants includes a coverage ratio of 1.1x to 1, tangible net worth of at least $163.8MM, debt to total assets of no greater than .625 to 1 and on one tranche a limit of capital expenditures of $30MM.

From 2020 to 2023 I am modeling sales of $109MM, $115MM, $129MM and $147MM, adjusted EBITDA of $39.8MM, $50.8MM, $57.1MM and $63.1MM, free cash flow of $19.4MM, $18.5MM, $26.4MM, and $30.9MM and adjusted EPS of $2.04, $3.16, $3.75 and $4.35.  2020 numbers are being impacted by soft pricing conditions due to a temporary inventory overhang driven by excess inventories at processors. This dynamic is due to Florida processors buying inventory from Brazil and Mexico to make up for expected Irma-related shortages, and then having higher than expected production from Florida growers in 2019.  Coronavirus-driven demand for orange juice is likely to lead to higher pricing although I have not modeled a significant recovery in my model. 

Valuation

Below is a summary of Alico’s NAV and valuation.  The business is highly seasonal with all of the company’s cash generated in 2Q and 3Q.  I have modeled full-year FCF of $19.4MM, but 1Q FCF was -$9.6MM and 2Q and 3Q are modeled at $12.4MM and $23MM.  I have also added a chart of the price/tangible book value of ALCO. The stock has historically bottomed at 1.2x with tradeable rallies.  During the recent crisis, the stock has been volatile and has traded at times below tangible book value.   

Management

John Kiernan has been the CEO of Alico since July 1, 2019.  He joined the company as CFO as CFO in 2015 and was largely responsible for the implementation of Alico 2.0.  Prior to joining Alico, Kiernan was the CFO of Greenwich Associates. He worked as Treasurer at Global Crossings until their sale to Level 3 and also was employed by Misys.  Early in his career he worked in Corporate Development for IBM and served as an MD at Bear Stearns. Rich Rallo is the CFO and has been at the company since 2017. Prior to joining Alico he was employed as COO and CFO American Medical Alert until it was acquired.  I have had meaningful interactions with management and have visited the company’s operations in Arcadia, Florida and interacted with numerous operational executives.

I have found John to be very thoughtful and believe that he is committed to creating value and narrowing the discount to NAV over time. The company has been a good steward of capital over the last several years. Debt has fallen from $205MM to $155MM since 2015. Alico has repurchased $34MM in stock and paid out $8.2MM in dividends over this same time period. The company is committed to paying out higher dividends. I believe they should move to a variable payout "formula" moving forward.

Catalyst

Ø  *Continued free cash flow generation with debt paydown

Ø  *Increased dividends

Ø  *Sale of East Ranch

Ø  *Water Conservation Project

Ø  *Increased investor outreach