Some of the things I look for when buying shares are earnings growth of the company, growth of the industry it operates in, increasing dividends, good management, fairly defensive earnings and that the share price represents good value.
When investing, I think it’s a good strategy to stick to the very best ASX share ideas. Why go with your 40th best idea? So, here’s my best idea this week: Vitalharvest Freehold Trust (ASX: VTH).
What Is Vitalharvest?
Vitalharvest is one of the few agricultural real estate investment trusts (REITs) on the ASX. The farms Vitalharvest currently owns are predominately citrus fruit and berries, which are all leased to Australian horticultural giant Costa Group Holdings Ltd (ASX: CGC). Vitalharvest has a profit-share agreement with Costa where it receives 25% of the operational profit from those farms.
The farms’ variable profit-share earnings of $7.7 million was the joint lowest since FY14 due to crumbly raspberries and fruit flies near the citrus farms which required additional cleaning (and costs).
However, if those variable earnings were to be the same as the next lowest amount ($8.2 million in FY14), then Vitalharvest would see a 6.5% increase.
Additionally, Vitalharvest earns a fixed 8% rental income on its cost base. Vitalharvest boosts this fixed rent each year it spends money on the farms, which should hopefully boost the profit the farm makes.
The REIT was only listed for 11 months in FY19, so in FY20 shareholders will earn an extra month of rental.
So, What’s The Big Deal?
Well, in a tough operating year, Vitalharvest paid a distribution of 5.65 cents, amounting to a current yield of 6.3%. An extra month of earnings could see FY20’s yield climb to around 7%. If the variable rent recovers, this yield could go even higher.
Unlike most other REITs like Arena REIT No 1 (ASX: ARF) and Goodman Group (ASX: GMG), Vitalharvest has not seen its share price rocket during 2019 to values far in excess of its balance sheet valuation.
In fact, when you take Vitalharvest’s water entitlements at market value, it has a value of $1.04. Meaning, at its current share price of $0.90, it’s valued at a 13.5% discount.
Global demand for food is going to keep rising with a bigger population, Asian middle class demand for quality Australian produce is increasing and climate change could cause the amount of usable arable land to reduce over the next decade.
Vitalharvest is steadily growing its base rent and the variable rent should also increase, leading to growing distributions. The REIT is fairly defensive and I think it looks good value. So, it essentially ticks all my boxes.
Disclosure: Jaz owns shares of Vitalharvest and Costa Group Holdings at the time of writing, but this could change at any time.