"Radicle Projects is Undergoing a Radical Restructuring"
The following article appeared in "Proactive Investors UK" last week:
"Read a few lines about Radicle Projects (RDP) and it is clear this is not your average company on London's Alternative Investment Market. Radicle was set up to invest in soft commodities in Australia. The initial logic for listing an Australian facing investment company in London was simple; it would differentiate itself from other investments quite clearly, and as a company investing in a wide range of soft commodities, including vineyards, tree plantations, apple orchards and grains, it would offer UK investors exposure to a sector not easily available in London. In fact, even four years after listing in London, Radicle Projects still doesn't have many peers in London. Asian Citrus (orange plantations in China), New Brit Palm Oil (Palm Oil in Asia) and several tree plantation funds exist, but few offer multi-soft commodity exposure.
After listing in London, Radicle embarked on an investment program in Australia, snapping up various interests in a range of projects either under development or in need of additional investment to improve their yields. A focus was creating liquidity and a secondary market in managed investment schemes, buying at deep discounts to future cashflows. With solid institutional backing from London, there was a balance between investments that would grow in value over time with the benefit of a development premium and future cashflows, and others offering more immediate cash flow from mature businesses to allow dividend payments.
At first, the business model appeared to be working. Beginning in 2005 Radicle invested in several projects, all in Australia, including wheat, trees, apples and vineyards (more details at end of article). The development projects produced strong value gains in early years and cashflows are still steadily increasing. However, Radicle was not immune to the global turmoil that hit the markets half way through 2008. As part of the company's initial investment strategy, convertible loan notes were issued to finance some of the company's projects. At the time of issuing the loan notes, having debt on your balance sheet was not considered an issue. How things changed in September 2008 with the collapse of US Investment Bank Lehman Brothers. Almost overnight, companies with debt on their balance sheet were considered very risky, and the share prices of those companies quickly corrected to reflect the perceived risk of defaulting on debt.
The biggest body blow to Radicle Projects came in December 2008, after the company suspended its shares. The share suspension, which was lifted in February 2009, was down to substantial revaluation of its Paulownia timber asset. The annual assessment of the project calculated the project would not generate as much revenues as initially hoped due to lower tree growth rates, which in turn hammered the net asset value (£5.15m in 2008 compared to £7.81m in 2007). Radicle Projects was also forced to take a one-off exception write down on cost associated with a Timber Fund which was aborted in August 2008. For the year ended December 31 2008, Radicle posted a loss before tax of £4.5 million and scraped the dividend. This left Radicle in a precarious position - its balance sheet had weakened considerably, with net assets of approximately £6.5 million (including £1.8 million in cash) compared to a net debt position of £12.5 million.
However, since the turn of the year, stock markets have recovered somewhat, and risk aversion to debt laden companies has softened considerably. The better sentiment has benefited Radicle, who announced last month that they had come to an agreement "in principle" with 75% of the convertible loan note holders, to reduce the face value of the debt by 60% of the original £15.1 million value of the notes.
As part of the agreement, Radicle Projects will have to raise cash via an equity placing, or by selling off some of its investments in Australia - or both. What is interesting is the value of those projects in Australia. While they are only valued once a year, one would be hard pressed to see how they could have dropped substantially in value since December 2008. In fact, Radicle has announced some positive milestones at one of its vineyards, where the grade of the grapes being produced has increased from ‘D' to ‘B', and the company's investment in a high end apple plantation, which is due to reach maturity in 2010, should have held its own, or perhaps increased in value.
After an interview with Radicle's CEO, Tim Bennett, it is evident that the company is considering all the options available to it, including asset sales, in an effort to clean up the balance sheet and get the company back on track.
Whether Bennett can pull this off remains to be seen, but if the debt can be restructured and the company can raise cash from one or two asset disposals, Radicle will be a much healthier looking investment.
In the meantime, adding Radicle to your radar screen could be a worthy exercise.
Looking ahead, Bennett believes the company has learnt the hard way that it is too small and undercapitalised to invest directly in soft commodity investments, as it can't invest in enough projects over a short period of time to help soften the blow of any one project going off kilter. Instead, Radicle is looking to act more like a manager of projects on behalf of other investment groups. Of particular interest to Radicle are a number of private equity groups that have built up sizeable land positions in areas of Australia where the land is suitable to upgrading for crops. Bennett's expertise is taking unused land and converting it into arable land. By doing so, the value of the land increases several fold, which is good news for the private equity group, and good news for Radicle if it is managing the project with the usual management fees and bonuses.
Radicle isn't out of the woods yet, but it can see the wood from the trees.
Radicle Projects current investments
Gumeracha Vineyards(100%)
Radicle acquired the vines, land and buildings as well as sufficient machinery to operate the Gumeracha Property, which is approximately one mile from Radicle's existing vineyard asset in the Adelaide Hills. Produces Blanc, Pinot Noir and Chardonnay grapes.
Adelaide Hills Vineyards (19.95%)
Radicle's interest (both primary and secondary) in the Adelaide Hills Premium Wine Project specialising in high demand white varieties-such as the cool climate Sauvignon Blanc. Radicle has also acquired stapled shares in the company owning the land that the vineyard is developed on, Adelaide Hills Investments Limited (AHIL).
Timbercorp (Various interests)
Radicle has purchased interests in several Timbercorp MIS projects, which include almonds, olives, eucalyptus and citrus. As a result of Timbercorp's liquidation some of these assets will be sold, some restructured and a small number written off.
Paulownia Hardwood Plantations (100%)
Located in Queensland, the marketing and sale of timber from the plantations is expected to begin within the next six months.
AHM Organic Apple Project (50%)
The AHM Organic Apple Project is located in the Nangwarry Region of South Australia. The orchard has been planted with five different apple varieties at density of 2,200 trees per hectare over 106 hectares. Harvests will begin in 2010 and reach full maturity in 2013.
AHM Early Season Apple Project 2007 (25%)
This 100 hectare project is in the Riverland Region of South Australia, and is also anticipated to begin harvests in 2010.
Rivercorp (19%)
RiverCorp owns the land, water rights, trellising, trees and irrigation of the AHM Early Season Apple Project 2007.
Wheat (15%)
"The Grain Project" comprises of approximately 125,000 hectares, of which over 100,000 hectares is located in the wheat belt of Western Australian. The Grain Project also has smaller fields in South Australian, Victorian and New South Wales.
BioForest Dual Income Project (70%)
The BioForest Project incorporates the growing of two crops side by side and therefore, generates two concurrent streams of income. The primary crop is high value Silky Oak, a hardwood tree species native to Australia, which will generate long-term cash flows over ten to 15 years. When harvested, the crop will be sold as sawn timber and veneer. Alongside the Silky Oak, a fast growing species called She-oak is also planted."
