By John Helmer, Moscow
Oleg Deripaska, control shareholder and chief executive of the Russian state aluminium monopoly Rusal, hasn’t exactly made a positive rate of return for Asian investors. In fact, share-buyers at the Hong Kong Stock Exchange are likely to conclude that he’s made a hash of every venture he’s tried to bring to that particular market.
Starting with Rusal, the first Russian corporate issue on the Hong Kong exchange, the share dropped 8% on its debut in January 2010, and the company has subsequently lost more than half its initial capitalization. Why then should Deripaska risk his reputation and asset value again with a fresh offer to Asian investors, particularly the Chinese? Answer: he has no reputation and little asset value left to lose.
The second answer is that with state bank encouragement, the Chinese have been on a global acquisition drive for agricultural land, crops, and foodstuffs, especially pork. They have spent heavily in the US, Canada, and Australia. They tried but failed in Ukraine. They have yet to try Russia.
Leaked to a Moscow newspaper two weeks ago, Deripaska is advertising the sale of a stake in Kuban Agroholding, in Krasnodar in southwestern Russia, where he produces wheat, animal feed, oilseeds, sugar, beef, milk, and pork. Basic Element, Deripaska’s Russian asset holding, claims its wholly-owned Kuban unit “is one of Russia’s largest agribusinesses”. That’s an exaggeration. As a pork producer, it is dwarfed by more than 20 other Russian companies; for more details on those, read this.
As a producer of sugar from beets, Deripaska falls far short of Vadim Moshkovich’s Ros Agro Plc, the London-listed company known in Russia as Rusagro. It produces roughly six times more volume of sugar beets than Kuban Agro; four times the volume of oilseeds. The current market capitalization of Rusagro is $714 million.
The second Russian agribusiness listed on the London Stock Exchange is Cherkizovo, which is a poultry and pork specialist. Its latest report for 2014 indicates pork sales for the year of 170,172 tonnes; there is no comparable figure for Kuban Agro, but it is believed to be a tiny fraction. Cherkizovo’s market cap is $592 million.
Both Rusagro and Cherkizovo are currently valued in the market at 3x Enterprise Value (EV) to Earnings (Ebita). Their price/earnings ratio (P/E) is around 1x. There are few investment bank analysts in Moscow who currently cover the agribusiness sector; even fewer who are willing to hazard a guess for the valuation of Kuban Agro. None reports that for a foreign investor Kuban Agro could match the valuation metrics applied to Rusagro and Cherkizovo.
By international standards, Kuban Agro’s production is small and unstable from year to year. Its revenues were reported to have been $189 million last year; they were falling even before the rouble devaluation. The questions Deripaska and Kuban Agro decline to answer in financial reports is what value they place on Kuban Agro’s assets net of debt; what price they think the Chinese should pay; and what reason a Chinese investor should have for supposing that this Deripaska venture won’t go the same way as his others.
For more on the ill-fated attempts Deripaska has made to list on the Hong Stock Exchange, read this on Strikeforce Mining and Resources (SMR), a molybdenum miner. For the Eurosibenergo story, click here. Exaggeration of earnings and lack of investment security and government guarantees against loss proved insuperable obstacles in both cases.
Deripaska keeps Kuban Agro’s earnings (Ebitda) secret. But the available data suggest they have been stuck in the range of $50 million to $60 million for each of the past three years. On comparable price to earnings or enterprise value to earnings multiples for Rusagro and Cherkizovo, Kuban Agro is unlikely to be worth more than $150 million. Is Deripaska offering a minority stake for a sum so small the Chinese should be willing to risk giving it away?
According to Andrei Oleynik (right), chief executive of Kuban Agro, the pitch is for an investment of “more than $200 million — this sum will include the cost of the stake and additional resources for development.” Oleynik told Kommersant that the size of the shareholding would be “less than control”. He identified China Investment Corporation (CIC) as one of the potential investors currently in discussion.
Oleynik told another newspaper last week that negotiations with foreign investors, including Chinese and Middle Eastern groups, started in 2013. “Right now this issue has become more urgent.” Conceding that Kuban Agro is small compared to other Russian farm producers, he claims its attractiveness to investors is profitability by hectare. “We have no goal to become the largest [producer], such as in arable land. Remember that in 2012, Black Earth Farming held 500,000 hectares in management and [was running] multi-million dollar losses. Accordingly, we have a goal – it’s efficiency. We measure earnings per hectare. Depending on the crop, we are focusing on profit of Rb25,000 per hectare per annum. On average, the [Russian] market turns in between Rb15,000 and Rb17,000. We have above average.”
KUBAN AGROHOLDING – REVENUES BY PRODUCT, CHANGE OVER TIME
(in millions of roubles)
Key: Green – crop production; yellow – oilseed refining; brown – livestock processing; red – meat; blue – seed production; white – industrial services; grey – other.
As the next tabulation indicates, Kuban Agro’s land holding is smaller than the top-20 Russian operators.
LEADING OWNERS OF AGRICULTURAL LAND IN RUSSIA, 2014
Black Earth Farming, which is listed on the Stockholm stock market, reports that it has 254,000 ha under present cultivation. Kuban Agro doesn’t disclose comparable figures. The latter’s harvest total is roughly one-third below Black Earth’s reported volumes. Black Earth reports that in 2014 its Ebitda was $21 million; its bottom-line was a loss of $17.5 million. Market capitalization for Black Earth is currently the equivalent of $96 million.
Through the Basic Element website, Kuban Agro issues annual press releases with selected production and financial results. Debt is not disclosed. Spokesmen for Basic Element and Kuban Agro were asked this week for the earnings figures, so that a valuation of the company might be attempted. They refused.
Devaluation and the war-related ban on imports of European Union, US and Australian foodstuffs to Russia ought to be good for Russian agribusinesses. According to British soft commodity trader and Volga region investor, Philip Owen, “the business is booming at the moment. Russia makes a virtue out of a lack of railway capacity to export grain by announcing export bans that keep local prices down. Meanwhile, pork prices are high for well-known reasons. Nobody should be disinvesting. It is also well known that Chinese firms are investing heavily in overseas pork production. The Donbass/Crimea debacle damaged a major Chinese pork producing investment that was to have included a port facility in Crimea (within Ukraine).”
Oleynik told RBK last week the short-term impact of the sanctions and counter-sanctions has been a deterioration in the financial position of Russian agribusinesses, starting with the rising cost of capital, and of imported equipment and seeds. Fertilizer, he added, is priced in dollars. Oleynik is currently estimating that payback for investment in Russia is being stretched out from five years, before the crisis, up to ten years on present calculations “Promises to fill up the country’s [consumption needs] with its own products have nothing to do with reality. It is simply impossible!”
Dmitry Rylko (right) , head of the Institute for Agricultural Market Studies (IKAR) in Moscow believes that Kuban Agro’s bid for Chinese investment is “quite a realistic scenario, because there is a mutual desire now, for obvious reasons. It is likely that our major companies will be able to enter the appropriate investment markets. Some time ago, Singapore’s Olam invested in the agricultural-economic projects in the Penza region. There is also a small South Korean investment in Russian agribusiness.”
Olam, which is listed on the Singapore Stock Exchange, announced in January of 2012 that it was paying US$75 million for a 75% stake in the Russian dairy producer, Rusmolco. According to Olam at the time, “this translates into RUSMOLCO enterprise value of up to US$130 million (subject to closing conditions, net debt and working capital adjustments at closing). In the first phase of expansion spread over the next 4 – 5 years, RUSMOLCO will invest to expand the area under grains cultivation from the current 52,000 hectares to 106,000 hectares. In addition, four new modern dairy farms will be constructed, taking the total milking cow population from the current 3,600 heads to 20,000 heads.” At the time, Olam explained its Russian investment rationale as: “significant comparative advantages in primary production. Arable land available at significantly lower cost compared to the US, Western Europe and Australia where average yield is only 2x the Russian average. Fertile soil and suitable climate conditions where drought is a 1-in-50 years event compared to more frequent droughts seen in the US and Australia. Well-developed and efficient inland and port logistics (costs lower than the next marginal producer) help support higher ex-farm prices.”
Since 2012 Olam has reported negatively on its Russian investment. “In Russia,” the company said in its annual report for 2013, “our dairy farming also faced operating challenges which impacted margins for the upstream business. While our upstream business remains attractive in the long-term, we are undertaking a review of the asset intensity of the overall dairy portfolio and expect to implement a restructuring plan over time.” In Olam’s report for 2014, issued last October, the company speaks of “continued underperformance from our dairy farming operations in Rusmolco, Russia. We have strengthened the teams running these businesses with a mandate to drive more efficient dairy production.” .
Other Russian sources are sceptical. Andrei Danilenko of the milk producers’ association Soyuzmoloko says that investors from China, Japan and Singapore have been interested in the Russian agricultural market, but stopped short so far from making significant commitments. He identified CIC as one of the potential investors; another, he said, is a Thai sovereign wealth fund. State Duma deputy Arkady Ponomarev, who came from the agribusiness sector, has told a Moscow newspaper that CIC is unreliable. “They often position themselves to get assets for next to nothing. In Voronezh they saw [an agribusiness] which hadn’t collapsed; it was a running enterprise. Since then, as far as I know, there wasn’t serious contact between them.”
Andrey Sizov from the Sovecon consultancy notes that in theory Kuban Agro’s bid for Chinese investment “is possible. China has been actively negotiating with Ukraine on this subject. But that was under [ex-President Victor Yanukovych]. Now it has stopped. If we talk about foreign investments, they might come from the US, Europe, Asia and the Gulf. But now we understand that western investment at the moment is difficult to anticipate. Chinese [investment], yes, it is possible, given that Russian politicians say that we have a strategic friendship with China, and that there is a Chinese investor who is willing to invest enough in agricultural projects abroad.”
What exactly happened to the grand plan, two years ago, for Chinese investment in Ukraine remains controversial. In September 2013 the Chinese media announced “a 50-year plan, [according to which] Ukraine will initially provide China with at least 100,000 hectares – an area almost the size of Hong Kong – of high-quality farmland in the eastern Dnipropetrovsk region, mainly for growing crops and raising pigs. The produce will be sold to two Chinese state-owned grain conglomerates at preferential prices. The project will eventually expand to three million hectares.” This was the Chinese version of the initial agreement.
But the terms of the deal unravelled almost immediately. KSG Agro, the Ukrainian partner, issued this disclaimer. According to the Ukrainian version, “KSG Agro and its Chinese partners are working on a contract for cooperation in the execution of a project aimed at the installation of drip irrigation systems over an area of 3,000 hectares in 2014. The Chinese party is interested in investing in and delivering equipment for the drip irrigation systems. This is just the first stage of a project that may in the future gradually expand to cover more areas covered by the drip irrigation systems as well as the first stage of cooperation in the area of application of modern technologies in crop production, vegetable growing and pig farming.
KSG Agro does not intend or have any right to sell land to foreigners, including the Chinese.”
Five months later, by the time Yanukovich was overthrown in Kiev, the prospects of a major Chinese investment in agricultural land and agribusiness in eastern Ukraine, had collapsed.
American meat traders based in Moscow say they have heard one reason Deripaska is trying to sell a stake in Kuban Agro is that he “willed this project to his wife as part of their divorce settlement.” There is no independent confirmation of this claim, however. Nor is there public evidence of either a formal divorce or a legal settlement between Deripaska and his wife, Polina Yumasheva.