Independent Research, Turtles all the way down

Turtles all the way down

Independent Research

Writing short articles about mis-priced boring stocks around the world.

Equity Bottom-Up

Whenever I get a bit too interested in macro economics I see it as a signal that I need reduce my commodity exposure. I wrote short write-ups on CLF (steel), PXD (mostly oil) and TOU (mostly gas) in the past month or so. And was long all three. I still like them, but not enough to hold on to them.

Whenever I get a bit too interested in macro economics I see it as a signal that I need reduce my commodity exposure. I wrote short write-ups on CLF (steel), PXD (mostly oil) and TOU (mostly gas) in the past month or so. And was long all three. I still like them, but not enough to hold on to them.

Cleveland-Cliffs, Pioneer Natural Resources, Tourmaline Oil: Too Much Commodity Exposure

<ul>
<li>Trading at 10-12x FCF, debt free and ~10% ROIC at 2019 steel prices</li>
<li>2019 steel prices were reflective of past decade average</li>
<li>Likely trading at 20-25% FCF yield going forward</li>
<li>Company will have low cost advantage</li>
<li>Everything set up perfectly for higher steel prices in medium term</li>
</ul>


Trading at 10-12x FCF, debt free and ~10% ROIC at 2019 steel prices
2019 steel prices were reflective of past decade average
Likely trading at 20-25% FCF yield going forward
Company will have low cost advantage
Everything set up perfectly for higher steel prices in medium term


Value Investing

Vladimir Dimitrov, CFA

<ul><li>As a long-term investor in Cleveland-Cliffs with cost basis in mid-single digits, I remain committed to my investment thesis.</li><li>The previously skeptical sell-side analysts are suddenly recognizing the potential behind CLF, after the stock returned nearly 500%.</li><li>Trading volumes are also extremely high, partly driven by the sharp increase in steel prices and renewed investors' interest.</li><li>I am keeping CLF as a Hold at this point time, meaning that I will not be increasing my position for the time being.</li></ul>

As a long-term investor in Cleveland-Cliffs with cost basis in mid-single digits, I remain committed to my investment thesis.The previously skeptical sell-side analysts are suddenly recognizing the potential behind CLF, after the stock returned nearly 500%.Trading volumes are also extremely high, partly driven by the sharp increase in steel prices and renewed investors' interest.I am keeping CLF as a Hold at this point time, meaning that I will not be increasing my position for the time being.

Cleveland-Cliffs Is A Long-Term Buy, But Don't Get Caught In The Short-Sighted Mania

SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

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With Russia emerging as one of the world’s largest bread baskets, Evgeny Tugolukov dreams of realising the country’s agribusiness potential in Southeast Asia’s developing markets.

“It’s remarkable for us to be able to participate in the renaissance of Russian agriculture,” said Tugolukov, the Executive Chairman of SGX-listed agrifood producer Don Agro International.

“Our listing in Singapore allows us to gain closer proximity to key high-growth markets in this region, and contributes to our country’s collective effort in reducing shortages in global food supply.”

From a net wheat importer at the turn of century, Russia has gradually transformed into a net wheat exporter since 2015, helped by the rouble’s depreciation and the government’s aim to prioritise self-sufficiency in agricultural output.

Southeast Asia, in comparison, is the world’s largest importer of wheat, as rising per capita incomes and robust population growth spur a shift in consumer tastes towards more wheat-based diets.

“With Southeast Asia’s tropical climate limiting wheat output, domestic production is almost non-existent, meeting less than 1% of demand,” said Tugolukov, who has spent more than two decades of his career holding top management positions in various financial and industrial groups.

“Imports are needed to meet increasing demand for both food and feed uses in the region.”

Don Agro, which listed on SGX Catalist in February 2020, is the first Russian company to trade on Singapore Exchange. It is one of the largest agricultural companies in Russia, principally engaged in the cultivation of crops such as winter wheat, sunflower and corn, as well as the production of raw milk.

The Group’s operations are located in the Rostov region, one of the country’s most fertile regions, situated close to the Azov Sea and Don River, which house major international ports.

Being one of the top farms in terms of milk output in Rostov, Don Agro owns more than 4,000 heads of dairy cattle, including approximately 2,000 milking cows. It has a controlled land bank of more than 50,000 hectares, of which more than 40,000 hectares are arable land, and approximately 14,000 hectares are owned by the Group.

Contrarian Choices

Tugolukov, a graduate of Russia’s Ural Federal University with a Diploma in Economics and Management, bills himself as “a long-term investor”.

In 2008, he founded Singapore-incorporated Strongbow Investments Pte Ltd, which invested in sectors ranging from technology and entertainment, to healthcare, real estate and agriculture, with a geographic focus on Southeast Asia, Russia and Eastern Europe.

In 2012, the former Member of Parliament of the State of Duma of the Russian Federation and former Chairman of the State Duma Committee on Natural Resources acquired Don Agro LLC, a Russian agricultural producer based in the Rostov region.

Don Agro International was then established in Singapore in 2018 by Tugolukov and Marat Kildeyev, Don Agro’s current Chief Executive Officer, as a holding company for the Group’s Russian agribusiness.

“When we took over Don Agro, we immediately noticed the potential for wheat and its exports. We strategically focused on this crop and benefitted from its growth, along with the rest of the industry in Russia,” Tugolukov recalled.

Back then, agriculture wasn’t profitable or as popular with investors. But Tugolukov took a contrarian stance, snapping up parcels to build the Group’s land bank. Today, this strategy has paid off – plot prices in Russia have tripled in recent years following huge capital flows into the industry, and as competition for arable land escalated.

Eight years ago, Don Agro’s dairy business was bleeding red ink and on the verge of shuttering. “Based on our visits to several farms in Europe and the US, we adopted industry best practices and identified the key issues that were preventing us from achieving good dairy yields,” Tugolukov said.

“Following changes in technology and processes, but without having to make significant investments, we managed to increase our yields by 2.5 times and turn around our operations.”

Another milestone in the Group’s history was its choice of farming technique.

“Seven years ago, we bet on a modern, eco-friendly, no-till method of growing our crops. This strategy allowed us to minimise the impact of negative weather conditions, as well as maximise revenue and income per hectare,” he noted. “The technique has now been applied to more than 6,000 hectares of our land bank.”

Agri Powerhouse

Today, Russia has morphed into an agricultural powerhouse, with bright prospects. In 2019, the country was the world’s largest exporter of wheat, the second-largest producer of sunflower seeds, and the fourth-largest producer of milk. The climate in Southern Russia, and Rostov in particular, has become milder, helping to increase crop yields.

Russia’s Agriculture Ministry has forecast the country will harvest an average 140 million tonnes of grain per year until 2035, up 24% from 2018. Some US$4 billion will also be invested to boost the logistics infrastructure of its grain and feed industries. The anticipated surge in grain production is projected to drive the overall value of Russian agriculture exports to US$45 billion in 2025, double that of 2018 levels.

“We expect Russia to further strengthen its position as the world’s bread basket. The state is committed to supporting the agricultural industry, and more land is slated to be converted to arable fields,” Tugolukov pointed out. “We believe Russia will continue to see a boom in agricultural output.”

And as the industry continues to flourish, land prices will appreciate further, benefitting many of the country’s agribusinesses, he added.

“Despite the current price appreciation, Russian land is still considered undervalued in comparison to many parts of Eastern Europe. This suggests there may be room for more price hikes over the next three to five years.”

Tugolukov remains committed to building Don Agro’s value, systematically over time. The Group will use acquisitions to boost its land bank, while increasing the share of land it owns, as it currently rents a significant number of sites it operates on.

Open to mergers and acquisitions, joint ventures and strategic alliances, the Group is seeking suitable opportunities to expand into high-growth segments in Russia. These include other districts within the Rostov region, as well as the Krasnodar region.

Vertical Integration 

In addition, vertical integration is on the cards, through the building of silos and/or venturing into Southeast Asian markets as a trader.

“Currently, the export-oriented crop processing segment looks very complementary to our operations. This segment will add value and minimise risks to our business,” Tugolukov noted. “In particular, we are exploring the production of sunflower oil, which looks to be a perfect fit.”

“Recent food security challenges – such as maintaining stable crop supplies to countries in Southeast Asia – have highlighted many growth opportunities for Don Agro, particularly in this part of the world,” he added.

Growth momentum, however, has been limited by Don Agro’s storage capacity, which previously stood at about 65,000 tonnes. The Group recently commissioned a total of 30,000 tonnes of new storage capacity across five of its facilities, and will continue to pursue other storage expansion opportunities. The increased capacity will also facilitate its plan to engage in the trading of crops and other commodities, he noted.

Other challenges the Group faces include Russia's shifting demographics, which has sparked labour shortages. “Rural-urban migration trends have resulted in a more competitive labour market in the areas where we operate, and it now costs more to attract and retain talent,” he said.

Changing weather conditions also keep him awake at night. “One of the most important indicators of success in agriculture is yield per hectare, which is significantly dependent on weather conditions,” he pointed out. “When we get unfavourable frosts in April or a lack of precipitation in May, this raises major concerns.”

Tugolukov’s vision is to grow Don Agro into a multi-billion dollar company in terms of revenue and market capitalisation. “Southeast Asia offers tremendous opportunities to realise Russia’s agribusiness ambitions, and I want to make this happen as quickly as possible,” he added.

According to the United States Department of Agriculture, Southeast Asia’s wheat imports in 2013/14 have increased by more than 60% to 26.7 million tonnes in 2018/19, and are forecast to rise to 27.5 million tonnes for 2019/20. Indonesia and the Philippines are the world’s second- and third-leading wheat importers, accounting for about two-thirds of the region’s wheat imports.

Work aside, the 50-year-old father of a boy, two girls, and one more on the way places a huge premium on family life. He considers himself a traditionalist when it comes to core values.

“Integrity and honesty are at the top of my list – I try to lead by example and require my employees to do the same, to keep their word in all things,” he said.

Staying positive is another mantra. “Maintaining a positive mindset helps me to make correct and optimal decisions when running the business,” Tugolukov added.

“I encourage my team to adopt this positivity regardless of circumstances, and to make the best of each and every situation that arises.”

 

Don Agro International Ltd

Don Agro is one of the largest agricultural companies in the Rostov region in Russia, principally engaged in the cultivation of agricultural crops and production of raw milk. The Group has a controlled land bank of more than 50,000 hectares, of which over 40,000 hectares are arable land. The Group also owns approximately 14,000 hectares of its controlled land bank. Don Agro’s operations are located in the Rostov region, one of the most fertile regions of Russia, situated close to the Azov Sea and Don River, which house major international ports. In its the crop production segment, the Group is primarily engaged in the farming of commercial crops such as winter wheat, sunflower and corn. It is also one of the top farms in terms of milk production in the Rostov region, and owns more than 4,000 heads of dairy cattle, including approximately 2,000 milking cows.

The company website is: <a href="http://donagroint.com/">donagroint.com</a> 
Click <a href="https://www.sgx.com/securities/equities/GRQ">here </a>for the company's StockFacts page. 
For the half year ended 30 June 2020 financial results, click <a href="https://links.sgx.com/1.0.0/corporate-announcements/RK2HN4L93ESTOVVA/628439_DonAgroHY2020ResultsPressReleaseFINAL.pdf">here</a>.

About kopi-C: the Company brew

Text: Jennifer Tan-Stanisic Photo: Company file kopi-C is a regular column on the SGX Research website that features C-level executives of leading companies listed on Singapore Exchange. These interviews are profiles of senior management aimed at helping investors better understand the individuals who run these corporations. 
For previous editions of kopi-C: the Company brew, please click <a href="http://edm.sgx.com/a/hBd-CspB86%24MfB90noBAABR54ZH/link10">here</a>.   
For more information, or if you would like your senior executives to be featured on SGX Market Dialogues, please send suggestions to <a href="jennifer.t@sgx.com">jennifer.t@sgx.com</a>.
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    DonAgro-CEO


With Russia emerging as one of the world’s largest bread baskets, Evgeny Tugolukov dreams of realising the country’s agribusiness potential in Southeast Asia’s developing markets.

“It’s remarkable for us to be able to participate in the renaissance of Russian agriculture,” said Tugolukov, the Executive Chairman of SGX-listed agrifood producer Don Agro International.

“Our listing in Singapore allows us to gain closer proximity to key high-growth markets in this region, and contributes to our country’s collective effort in reducing shortages in global food supply.”

From a net wheat importer at the turn of century, Russia has gradually transformed into a net wheat exporter since 2015, helped by the rouble’s depreciation and the government’s aim to prioritise self-sufficiency in agricultural output.

Southeast Asia, in comparison, is the world’s largest importer of wheat, as rising per capita incomes and robust population growth spur a shift in consumer tastes towards more wheat-based diets.

“With Southeast Asia’s tropical climate limiting wheat output, domestic production is almost non-existent, meeting less than 1% of demand,” said Tugolukov, who has spent more than two decades of his career holding top management positions in various financial and industrial groups.

“Imports are needed to meet increasing demand for both food and feed uses in the region.”

Don Agro, which listed on SGX Catalist in February 2020, is the first Russian company to trade on Singapore Exchange. It is one of the largest agricultural companies in Russia, principally engaged in the cultivation of crops such as winter wheat, sunflower and corn, as well as the production of raw milk.

The Group’s operations are located in the Rostov region, one of the country’s most fertile regions, situated close to the Azov Sea and Don River, which house major international ports.

Being one of the top farms in terms of milk output in Rostov, Don Agro owns more than 4,000 heads of dairy cattle, including approximately 2,000 milking cows. It has a controlled land bank of more than 50,000 hectares, of which more than 40,000 hectares are arable land, and approximately 14,000 hectares are owned by the Group.

Contrarian Choices

Tugolukov, a graduate of Russia’s Ural Federal University with a Diploma in Economics and Management, bills himself as “a long-term investor”.

In 2008, he founded Singapore-incorporated Strongbow Investments Pte Ltd, which invested in sectors ranging from technology and entertainment, to healthcare, real estate and agriculture, with a geographic focus on Southeast Asia, Russia and Eastern Europe.

In 2012, the former Member of Parliament of the State of Duma of the Russian Federation and former Chairman of the State Duma Committee on Natural Resources acquired Don Agro LLC, a Russian agricultural producer based in the Rostov region.

Don Agro International was then established in Singapore in 2018 by Tugolukov and Marat Kildeyev, Don Agro’s current Chief Executive Officer, as a holding company for the Group’s Russian agribusiness.

“When we took over Don Agro, we immediately noticed the potential for wheat and its exports. We strategically focused on this crop and benefitted from its growth, along with the rest of the industry in Russia,” Tugolukov recalled.

Back then, agriculture wasn’t profitable or as popular with investors. But Tugolukov took a contrarian stance, snapping up parcels to build the Group’s land bank. Today, this strategy has paid off – plot prices in Russia have tripled in recent years following huge capital flows into the industry, and as competition for arable land escalated.

Eight years ago, Don Agro’s dairy business was bleeding red ink and on the verge of shuttering. “Based on our visits to several farms in Europe and the US, we adopted industry best practices and identified the key issues that were preventing us from achieving good dairy yields,” Tugolukov said.

“Following changes in technology and processes, but without having to make significant investments, we managed to increase our yields by 2.5 times and turn around our operations.”

Another milestone in the Group’s history was its choice of farming technique.

“Seven years ago, we bet on a modern, eco-friendly, no-till method of growing our crops. This strategy allowed us to minimise the impact of negative weather conditions, as well as maximise revenue and income per hectare,” he noted. “The technique has now been applied to more than 6,000 hectares of our land bank.”

Agri Powerhouse

Today, Russia has morphed into an agricultural powerhouse, with bright prospects. In 2019, the country was the world’s largest exporter of wheat, the second-largest producer of sunflower seeds, and the fourth-largest producer of milk. The climate in Southern Russia, and Rostov in particular, has become milder, helping to increase crop yields.

Russia’s Agriculture Ministry has forecast the country will harvest an average 140 million tonnes of grain per year until 2035, up 24% from 2018. Some US$4 billion will also be invested to boost the logistics infrastructure of its grain and feed industries. The anticipated surge in grain production is projected to drive the overall value of Russian agriculture exports to US$45 billion in 2025, double that of 2018 levels.

“We expect Russia to further strengthen its position as the world’s bread basket. The state is committed to supporting the agricultural industry, and more land is slated to be converted to arable fields,” Tugolukov pointed out. “We believe Russia will continue to see a boom in agricultural output.”

And as the industry continues to flourish, land prices will appreciate further, benefitting many of the country’s agribusinesses, he added.

“Despite the current price appreciation, Russian land is still considered undervalued in comparison to many parts of Eastern Europe. This suggests there may be room for more price hikes over the next three to five years.”

Tugolukov remains committed to building Don Agro’s value, systematically over time. The Group will use acquisitions to boost its land bank, while increasing the share of land it owns, as it currently rents a significant number of sites it operates on.

Open to mergers and acquisitions, joint ventures and strategic alliances, the Group is seeking suitable opportunities to expand into high-growth segments in Russia. These include other districts within the Rostov region, as well as the Krasnodar region.

Vertical Integration 

In addition, vertical integration is on the cards, through the building of silos and/or venturing into Southeast Asian markets as a trader.

“Currently, the export-oriented crop processing segment looks very complementary to our operations. This segment will add value and minimise risks to our business,” Tugolukov noted. “In particular, we are exploring the production of sunflower oil, which looks to be a perfect fit.”

“Recent food security challenges – such as maintaining stable crop supplies to countries in Southeast Asia – have highlighted many growth opportunities for Don Agro, particularly in this part of the world,” he added.

Growth momentum, however, has been limited by Don Agro’s storage capacity, which previously stood at about 65,000 tonnes. The Group recently commissioned a total of 30,000 tonnes of new storage capacity across five of its facilities, and will continue to pursue other storage expansion opportunities. The increased capacity will also facilitate its plan to engage in the trading of crops and other commodities, he noted.

Other challenges the Group faces include Russia's shifting demographics, which has sparked labour shortages. “Rural-urban migration trends have resulted in a more competitive labour market in the areas where we operate, and it now costs more to attract and retain talent,” he said.

Changing weather conditions also keep him awake at night. “One of the most important indicators of success in agriculture is yield per hectare, which is significantly dependent on weather conditions,” he pointed out. “When we get unfavourable frosts in April or a lack of precipitation in May, this raises major concerns.”

Tugolukov’s vision is to grow Don Agro into a multi-billion dollar company in terms of revenue and market capitalisation. “Southeast Asia offers tremendous opportunities to realise Russia’s agribusiness ambitions, and I want to make this happen as quickly as possible,” he added.

According to the United States Department of Agriculture, Southeast Asia’s wheat imports in 2013/14 have increased by more than 60% to 26.7 million tonnes in 2018/19, and are forecast to rise to 27.5 million tonnes for 2019/20. Indonesia and the Philippines are the world’s second- and third-leading wheat importers, accounting for about two-thirds of the region’s wheat imports.

Work aside, the 50-year-old father of a boy, two girls, and one more on the way places a huge premium on family life. He considers himself a traditionalist when it comes to core values.

“Integrity and honesty are at the top of my list – I try to lead by example and require my employees to do the same, to keep their word in all things,” he said.

Staying positive is another mantra. “Maintaining a positive mindset helps me to make correct and optimal decisions when running the business,” Tugolukov added.

“I encourage my team to adopt this positivity regardless of circumstances, and to make the best of each and every situation that arises.”

 

Don Agro International Ltd

Don Agro is one of the largest agricultural companies in the Rostov region in Russia, principally engaged in the cultivation of agricultural crops and production of raw milk. The Group has a controlled land bank of more than 50,000 hectares, of which over 40,000 hectares are arable land. The Group also owns approximately 14,000 hectares of its controlled land bank. Don Agro’s operations are located in the Rostov region, one of the most fertile regions of Russia, situated close to the Azov Sea and Don River, which house major international ports. In its the crop production segment, the Group is primarily engaged in the farming of commercial crops such as winter wheat, sunflower and corn. It is also one of the top farms in terms of milk production in the Rostov region, and owns more than 4,000 heads of dairy cattle, including approximately 2,000 milking cows.

The company website is: donagroint.com  
Click here for the company's StockFacts page.  
For the half year ended 30 June 2020 financial results, click here.

About kopi-C: the Company brew

Text: Jennifer Tan-Stanisic Photo: Company file  kopi-C is a regular column on the SGX Research website that features C-level executives of leading companies listed on Singapore Exchange. These interviews are profiles of senior management aimed at helping investors better understand the individuals who run these corporations.  
For previous editions of kopi-C: the Company brew, please click here.    
For more information, or if you would like your senior executives to be featured on SGX Market Dialogues, please send suggestions to jennifer.t@sgx.com.



Don Agro Cultivates Asian Agribusiness Ambitions 

Materials, IPO & Equity Analyst

Venkat Ramana Nandyal

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a>, an Australian pure-play iron ore producer, has returned nearly 130%, whilst LSE listed <a href="https://www.smartkarma.com/entities/ferrexpo-plc" target="_blank" data-smartkarma-citation="entities:24163:1" rel="noopener">Ferrexpo Plc (FXPO LN)</a> is trading 25% lower YTD. These stocks have diverged from the Iron ore prices which have increased by only 20% YTD.    More details below.

Fortescue Metals (FMG AU), an Australian pure-play iron ore producer, has returned nearly 130%, whilst LSE listed Ferrexpo Plc (FXPO LN) is trading 25% lower YTD. These stocks have diverged from the Iron ore prices which have increased by only 20% YTD.    More details below.

Australian Material: FMG - Too Rich Compared to Its Peers?

United States

Cleveland-Cliffs Inc. is an American iron ore mining company. The Company supplies iron ore pellets, lumps and fines to blast furnaces in the global steel industry. Cliffs is in the process of expanding its customer base to Electric Arc Furnaces.

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Cleveland-Cliffs Inc (CLF US)

Cleveland-Cliffs, Pioneer Natural Resources, Tourmaline Oil: Too Much Commodity Exposure

Whenever I get a bit too interested in macro economics I see it as a signal that I need reduce my commodity exposure. I wrote short write-ups on...

Turtles all the way down