HAI - Holde Agri Invest
Farming REIT with 12k hectares under management so far and 10-year, 20k target
2023 update: I sold this instantly when they published the 2022 report. Didn’t even finish the first couple of pages till I opened the brokerage account and hit sell.
Why? Here’s the paragraph from the annual report.
The net result of the period (without amortization of goodwill and lease contracts) was 1.83 million RON, down 81% compared to 2021. The net result (RAS) of the period was a loss of 2.1 million RON influenced by the non-recurring expenses related to the management contract (11.2 million RON). This payment will be made in the following period in shares. According to EGMS from 15.12.2022 this management contract has ceased and has been replaced by a Board of Directors. The adjusted net result (RAS) shows an increase of 39% compared to the previous year, validating the increasing efficiency trend of the Holde group's activity. The exceptional expenses related to the management contract have only an accounting effect, they will be honored through the conversion into ordinary shares. The management contract termination fee is related to the entire 4- year period when the company was managed by Holde Agri Management.
So they had hired a team that had fat exit bonuses tied to performance for 10 years. They fired them… resulting in payments of 11,2 million RON and then they hired themselves again.
LOL. Why aren’t these guys in jail? Likely because no one reads the fine print.
So they promised dividends in the 3rd year… they said no dividends, just free stocks, we need the cash to buy farms. Then they post some small profits, fire themselves, hire themselves and then have the audacity to do a ‘Majorare de Capital Social’ (share capital increase) asking from investors to cough up more money in order to retain their % in the company.
Because… they need money to purchase farms.
Sure, those 2 million euros? Management also needs to set themselves up for life, and they want it NOW not in 10 years.
Damn scammers.
Personal lesson is: if investing in small caps, watch like a hawk anything the company does, especially in corrupt countries like this one.
I may still build a position if they manage to get on the regulated BVB market.
Original post here:
Hi!
Today I’d like to share one of my favorite companies from my portfolio - Holde Agri Invest. It’s a fairly small venture, with a current market cap of almost 30M euros after it’s recent financing round.
This might be a bit all over the place so here’s a brief ToC first:
Background info & personal investment thesis
Business model, assets, expansion strategy and opportunities ahead
Management team
Opposing views and bear case
Pretty graphs with pretty numbers
Background info & personal investment thesis
Initially what caught my eye was it’s pretty website (yes, I know, don’t rub it in) but digging through it’s prospectus and ER’s, I felt that there’s value here. With under 4 years since it’s public launch, they have an interesting idea in a pretty fragmented market - agriculture.
People familiar with Romania’s landscape know that this is a country that is actually one of the biggest agricultural producers judging by size though it’s fragmented into lots and lots of small players - as we’re slowly transitioning to an emerging-economy, still according to the most recent data I’ve found, 44% of us reside in rural areas. To quote from the Holde.eu website:
The dimension of an average farm is one of the smallest in Europe as the agricultural land in Romania is split into many, very small land plots (1-2 hectares). The small and medium size farms are neither using either optimal agricultural technologies nor performance management schemes. On top of this, the production efficiency is suffering as most of the small and medium farms do not have efficient agriculture equipment and cannot afford to use big capacity machines and therefore production efficiency is at a low level while the production costs are high. Thus, there is an enormous opportunity to increase the farms’ performance and, consequently, increase EBITDA by benefiting from the modern technologies and machineries.
So it’s an interesting proposition: unionizing smaller farms and developing a central operations command point in order to share resources and achieve economies of scale between all operations, with fairly diverse lands which mitigate drought risks. They invested in modern machinery (tractors are expensive) and plan to further develop their storage and irrigation systems, which ideally would result in higher profit margins from each farm (or nucleus, as they call them).
In 2019 they owned under HAI 10 different SRL’s (the equivalent of LLCs in Romanian legislation). I find in this sufficient diversification, both in terms of hedging drought risks and in terms of being able to rotate produce and quickly adapting to market trends.
With a 10 year plan of investing over 50M Euros in agriculture, I think they have a resilient, recession-proof business model, though there are some risks and/or bear case scenarios which I’ll dive into.
So far, my initial reasoning somewhat holds water: when I originally invested, I was looking to diversify away from my main growth oriented portfolio on the USA market - due mostly to the free money policy ‘help’ they’ve offered during coronavirus, fueling all the money printer go brr memes.
I say somewhat because yes inflation affected America though with their recent tightening and their reserve currency status this has caused a ripple wave of currency devaluation through out the globe, the RON being affected as well.
Then again, there’s this interview with Liviu Zăganu (Holde’s CEO) which stated pretty matter of factly that inflation isn’t much of a concern with their business model though they’re certainly affected by supply chain issues (noting delays from order to shipment up to an average of 6-8 months from 2-3 months). Seeing how Azomureș, a leading local fertilizer supplier that handles over 50% of local demand, is heavily affected by rising gas prices (used in producing fertilizer) has decided to place a brief halt to their activities, this might end up being of some concern.
If you’re a more conspiracy minded reader, you can see a familiar theme between Holland’s fertilizer ban, Sri Lanka’s disastrous go green policies and more recently Canada’s even more authoritarian views on banning fertilizer - though causes are seemingly radically different, the invisible hand of the modern economy works in mysterious ways.
I’ve invested in the corn business (and whatever other produce HAI… produces) mostly following an asymmetric risk idea as outlined by Taleb (whose work I consider foundational for modern contrarian investors - and I’ve been delighted to see HAI’s management reference Taleb’s books - more in the management section). I figure, okay, I got most of my $ in Palantir, so basically software that will fuel the next generation, I should add a more conservative position to lower volatility.
Here comes HAI, which when I bought in operated under 10k hectares, with an ambitious growth strategy and fairly ambitious share-holder rewards. They’ve announced to start issuing dividends this year and in an effort to preserve capital and further develop their business, they have issued a number of stocks for existing owners (I think it was 1 for each 7 or 8?). In addition, they offered shareholders some contracts (calculated based on number of shares at time of issuing) that allowed them to purchase more stocks at a discount - or to sell the contract and pocket the difference. I personally chose to sell my contract and started a new position in another pretty resilient bet, Romania’s Fondul Proprietatea (more on this one in a future article).
So far so good - stock price is a bit on the decline recently though it’s holding up pretty well, and with dividends posted and the ‘drept de listare preferențială’ contract which I’ve opted to convert to FP shares, I’m happy. It’s currently trending a bit below my average buy-in so I’ll be looking for opportunities to consolidate my position here.
I take it as a good sign that they kept up to their word and posted shareholder dividends (this year in the form of stocks) after only their 3rd year in business, with many other investments requiring capital. It’s a pretty capital intensive business if they want to do it right but so far they seem to have a handle on things. Additionally, they seem to cater their investment thesis to the local investor - there are lots of companies on BVB that offer dividends, so they know that their average investor is one looking for stable prices and continuous dividends.
I see it as both a growth play and a value play - growth coming from their expansion of land under management and from their increasing profit margins after investing in modern machinery and smart financial engineering. They’re currently running a 10,000 tonne silo with plans to further develop in order to benefit from price arbitraging techniques from one season to the next (basically selling when there’s more demand so better margins). I’ll explain in the next chapter what I mean by smart financial engineering, though for now I guess that covers the why behind my decision: corn and agriculture smooth out nicely the bumps in the road from investing in software for the future.
This article paints a pretty picture in the sense that HAI has rapidly become the 5th largest player in the market, coming in after conglomerates originating from the United Arab Emirates, Portugal or Denmark.
No surprises for local readers - while we’re all busy moving abroad in pursuit of a better life (6 million Romanians are outside borders) foreigners are lapping up our farm land.
So even more reason, albeit leaning on the emotional aspects of decision making - supporting a company that keeps it’s operations home grown.
Business model, assets, expansion strategy and opportunities ahead
So they make their money by selling corn, wheat, barley, sunflower seeds… that sorta thing. Also, they make pretty good cash from subsidies accorded by the Romanian government - which I feel will continue for the foreseeable future.
Beyond that - their expansion strategy is one I like. Risky AF since they’re leveraged to the tits. Their capital management structure is one I also like as it’s tailored to growth, signing leases and buying land in order to benefit from scaling up operations.
This is what I meant by financial engineering.
Say, I have 100k euro’s and I’m looking to buy a farm.
I could buy it outright, and own 1 farm with 100k, and 0 debt - or, I can buy it on credit with 15k down, have 85k on my balance sheet, an 100k asset that will deliver both dividends and appreciation, and a 100k+interest credit statement.
Both are ‘correct’ ways to play it, though from what I gather from rich people, is that credit lines are the preferred MO rather than cash - and I agree, as long as said debts can be safely serviced, otherwise, well, we all know someone that was over levered.
From their current balance sheet, we can see that 10M Euros (or 1/3rd of their market cap) represents equipment whereas land and buildings - close to 5M euros.
Check out this article that shares some details into one of HAI’s recent acquisitions: for a farm that operates over 2k hectares, they’re out of pocket 250k RON (which is close to 50k euros) - the rest of the 10M RON (or 2M euros) are consolidated debt which will be transferred over to HAI.
Now, there’s two ways of looking at this: they either paid peanuts for an asset that will be paid off by the 7th year of operations, or they’re insanely leveraged up the wazoo.
I choose to view it as smart business making: agriculture seems to be a safe bet, and leverage in real estate is one of the primary wealth-building mechanisms of the 21st century. What other asset class could you show up with 5-15% ‘down’ and have the rest financed through banks and bonds and expect to have return both in produce and in terms of asset appreciation? I view it as even better than real-estate, where farms actually produce economic value rather than exploiting houses like good rent-seeking capitalists.
Add to this, in this year they’ve rewarded share-holders with more shares rather than cash (sure, it’s a bit dilutive - but if the pie’s bigger I’m okay with a smaller slice) in order to maximize cash reserves to have the means for more juicy deals like this one.
This ties into my next point of smart financial engineering.
Check out this article with an interview with Eugen Voicu, one of the original founders, explaining how it’s more profitable to rent agricultural lands for operating rather than buying.
Este mai eficient sa exploatezi terenul in arenda decat sa imobilizezi bani in teren. Rata de crestere a pretului la terenuri agricole este mai mica decat profitul pe care il poti obtine din exploatare.
Currently they operate more than 12k hectares of arable land, out of which I think they’re close to their goal of 2k owned (be it credit or otherwise) and the rest is rented from owners. If they pay peanuts for renting and they have the means to generate a higher yield through operations (either from arbitrage opportunities either from improving operations) I think it’s a reasonable bet. The lands are bought mostly on credit, on 7 and 10 year long engagements.
From their 2021 FY Report, we can see that they’re produced 28,000 tonnes of product, leading to revenues of 62M RON - a bit over 7000 RON / hectare. (That’s 1200 euro / hectare).
So they see an angle where with relatively low capital investment they can achieve mass-scale economies - be it through financing fields via debt or equity or renting fields. Accordingly, they’ve spent close to 1.5M Euros on renting said fields, while producing close to 11M Euros (including juicy government subsidies though, which are an angle of their own). Sounds like a fair deal to me - added benefit of still having people own said farms, rather than corporations.
Additional interesting ideas the company’s been exploring: circular agricultural partnership with a big egg producer. They’re basically trading cereals for fertilizer (chicken shit - “gunoi de grajd”). Might be interesting to see how this plays out with the added context of the rising costs of fertilizer.
They’re also investing in agro-tech start-ups, having recently acquired 10% in Enten Systems and AgroCity, with plans for more to come. I like this; it’s sorta like PLTR’s been doing with their SPAC investments, though less aggressive and all over the place - they concentrate investments in companies where they may own a sizable stake that could grow to a fairly large degree if they gain international traction (agricultural industry is ripe for all sorts of technological advancements) and they benefit from using the products (likely for free?) - helping them make better more informed decisions about their operations. Win-win-win all around.
Enten’s website’s here (meteorological precision agriculture) and AgroCity’s here (farm management system).
Management team
First, there’s this interview with Iulian Cîrciumaru, who made his money after exiting 7card and subsequently launched V7 Capital. He simply gushes over Taleb’s ideas on antifragility so I was definitely sold when he drew parallels from the book to his investing principles and business operations. Similarly, he invested in agriculture after having lots of exposure to tech in his portfolio so I understand the reasoning.
Up till now, he owns either personally either through different SRLs close to 25% of HAI - with pretty big purchases coming in regularly through the year. That’s confidence, if I may.
There’s another Taleb fan in HAI’s board, Robert Lisenche - in charge of investments. A recent LinkedIn post of his draws attention to the fact - and also, that he’s a smart guy, with close to 20 years experience in risk management in finance.
Eugen Voicu, one of the OG players of Romania’s capital markets, owner of Certinvest, has his fingers in this pie as well. He was originally contracted as board member though has since left I think to focus on his role as co-founder of Meta-Estate, another similar publicly traded company (I say similar since it’s designed to mimic how REITs work, kinda what HAI does) though to my knowledge he’s still holding on to his shares. He’s also one of the beneficiaries of the management fee the company has set out to pursue in it’s listing prospect. More on this in the next chapter.
There are also two other board members who still retain their function since inception: Alex Covrig, CFO with 25 years of experience and administering financing to the tune of 50M euros, Cosmin Mizof, ex-KPMG & PwC and Alexandru Leca, wide experience as venture capital investor and in private equity, ex-CEO and CFO of Tiriac Holding and A&D Pharma.
These are the sort of guys I want in charge of my money.
The CEO, Liviu Zăgan, as well is pretty well positioned for the role, with over 10 years of agriculture experience with his parent’s farm I believe and another farm operating 1700 hectares and with more than 15 years of architecture experience, 7 years of which under one of the biggest architecture firms as founding partner. It’s 7 years under it’s current form, after a couple of rounds of mergers - he’s founded this company in 2003 immediately after he finished university with a couple other associates, now the company operates close to 3M euros revenue / year according to this interview.
I like that they’re primarily business people. Iulian Cârciumaru, when asked about passion in business, has said that he wasn’t particularly passionate about sports when starting up 7Card. He said that he saw a market in need of a solution. He goes on to explain that while he admires what he calls passion-entrepreneurs, that they build businesses that are primarily uninvestible. As an investor, I like this.
Opposing views and bear case
I’ve tried to find opposing views to my ideas and the few that I have found noticeable are in the comments sections to this article (and the article itself).
The article brings to light the point that at that point there were class B shares, that we’re entitled to a preferred profit split - 35% or so going to them before having a chance to be split amongst the class A shares.
Since then, the company has to my knowledge converted all class B shares to class A.
The article hilariously continues in another paragraph starting in a ‘but that’s not all!’ fashion, where they say that management has the right to a complex profit sharing incentive, and that this fee is not at all small.
Fiecare dintre aceste persoane este implicata in activitatea continua a companiei,
contribuind la dezvoltarea acesteia, iar acestea primesc un salariu modic care nu
este proportional cu contributia lor in ceea ce priveste timpul si expertiza
investite. Prin urmare, onorariul anual va fi tratat de investitori ca o recompensa
financiara pentru implicarea continua a persoanelor specificate mai sus in
dezvoltarea companiei intr-un anumit an. In scopul motivarii echipei pentru a
livra rezultate, onorariul a fost structurat intr-o maniera care contine atat o suma
fixa cat si o componenta variabila care recunoaste atingerea anumitor repere
cruciale pentru dezvoltarea activitatii Emitentului. Structura prezentata mai sus a
fost votata si aprobata de actionarii actuali ai companiei, intrucat a fost
considerata proportionala si corecta, avand in vedere contributia persoanelor
mentionate la dezvoltarea afacerii.
HAI LISTING PROSPECT
I think the author misses the forest for the trees. YES, management’s being paid big $$$ (page 12 of the listing prospect) but it’s a profit sharing scheme. These guys are paid a fairly modest salary, if at all - and they’ve been continually with the company. Their most complex formula is the exit compensation scheme that is thought out at 10 years down the line. 10 years is a lot of time to wait for that big bonus, and if they’re correct in their estimations, that’ll increase in a nice payday, both for themselves (mostly for themselves) and for the average retail investor.
Now, remember when I mentioned that these are the guys I want in charge of my money?
And how I said that they’re primarily business people?
By that, I mean they’re capitalists. They’re using the capital markets for exactly what they’re for: raising capital, creating jobs and opportunities and creating wealth - primarily for themselves, secondly to their share-holders.
Sure, they’re in it for themselves. Why wouldn’t they be? If that’s what the market rewards, take it up with our capitalist overlords, not mere players of the game. I’d rather have business people that want to make millions for themselves and set up generational wealth for their heirs and me to nibble along on their coat-tails.
I get to sit around in my underwear while they’re busy being capitalists in boardrooms, signing up deals and wrangling ROI from excel files. From 6 board members, 5 have finance backgrounds and one being a successful investor and entrepreneur with multiple exits, and a keen study of the greats, and the one with actual extensive agriculture experience also has entrepreneurial experience.
Is it a problem that they’re making big $$$? Not for me. The language is pretty plain in this regard - it’s something that they have made public in their listing prospect. For all I care they can make millions as long as they stick to an investment plan that aligns with what I want.
I really don’t get the comments from that article that explain that this is a scam, a rip-off, “they’re running away with investors money”. Why would one care if another makes big $$ through legal means? I don’t view them as scamming me, as I’m investing exactly because I get why my investment matters. More investors in the game → less price fluctiations → higher liquidity → more interest → company can grow using their shares as collateral → all sorts of flywheel effects.
Would I bother doing the same thing for the same pay-out? Well, theoretically I could convince 100 farmers next to me and make it onto the stock market, in a sort of Jamaicans-winning-the-Olympic-sled-event, but… I’m not really interested. If there will be people that copy HAI’s model and use it say for fruits instead of cereals, I’d likely jump on it and invest. I prefer to minimize time spent working and it just sounds like too much of a hassle (have you seen Romanian bureaucracy?).
Let’s take for example Mr. Eugen Voicu - while he may not be directly involved involved anymore, he’s still owner of Certinvest, with extensive knowledge of the intricacies of Romanian bureaucracy and capital markets. I’m pretty confident he has an eye looking out for them - and has advised them over the years even if his involvement is in the background.
I suspect them being the first AeRO listed company to sign up deals with market maker entities to support market liquidity has to do with Mr. Voicu’s maybe indirect wisdom (though I’m completely speculating here, as the group has extensive knowledge of their own).
Having been started in 2018 and publicly listed by October 2020, they’ve entered the market-making deal by early 2022 and with recently declared ambition of making it onto the registered BVB market by 2023, they’re sure checking lots of the boxes. I mean, they got market maker deals before SNN, the publicly traded company with over 80% government ownership that operates Romania’s only nuclear power station.
Beyond that, they’re currently also in the BET-AeRO index, that tracks top 33 companies in the AeRO area. AeRO is like the BVB but less reglemented - and it’s been quite a success recently, with lots of cool additions which I’ll be covering. Even though it sounds like training wheels, it’s still no small feat to launch here and get included in the index. As I previously mentioned, Romania’s starting to be considered as an emerging economy - rather than a frontier economy, so that’ll translate to lots of tailwind effects, one of them manifesting through demand from international institutional players. They’re currently the 2nd largest position in the index, weighing in at 11% of the fund - coming in 2nd after AROBS (software company with 15%) and before Norofert (fertilizer producer with 5%).
With the recent acquisition (October ‘2022) of a small bit of One United properties by Vanguard, I feel confident in exposure to this market. Aimed also with the knowledge that there are relatively few players on the retail market here, I have a thesis that lots of people my age and younger will be looking for other investment areas that don’t necessarily include the obligatory Pilonul II if you’re salaried.
I mentioned if you’re salaried because I also believe that we’ll be experiencing a work-shift in the coming decade - coupling in Romania’s brain export (6 million of us across borders, 18 million left I think according to recent estimates), our government’s already comical approach of robbing Peter to pay Paul with their investment and pension strategies, Romania’s slowing birth rates and transitions to 1 child families, an already inflated state apparatus that employs more than 1 million people out of approximately 6 or 8 in the workforce, along with a general distrust of the government and maybe a distrust of the global capital markets, with the also recent addition to mainstream knowledge of investing and the ability to buy shares from your phone, I think we’ll be seeing an influx of investors in Romania’s markets - retail and otherwise.
Actually now that I think of it, my views of investing in Romania might merit exploring in an article of it’s own.
Oh, btw, about that Vanguard transaction? It’s small peanuts, they bought close to 10M euros into a company that’s current market cap’s at 700M euros. But the article mentions something interesting: that they bought it on BVB. I wonder if this 10M euro transaction was such small peanuts for Vanguards that they just said to their guy “hey Jeff - like, just, you know, click buy and set a market order or whatever and call it a day”.
Also now that I think of it I have no clue how Vanguard’s trades are processed so don’t place much weight behind my opinion.
Anyway, back to the point - additional risks for the company would be bankruptcy. They have close to 60% debt to assets. While that would be generally considered as reckless, I think it’s smart. They have enough liquidity in order to service their debts even considering some droughts in some of their areas. And this isn’t using leverage like the usual real estate investor or REIT - by investing in commercial or residential real estate and then renting out; it’s producing real assets that have tangible, constant demand. Sure, those real assets are corn and the likes - but still.
5. Pretty graphs with pretty numbers
Some pretty graphs, courtesy of Tradeville.
So yes close to 70% debt to assets - pretty wild fluctuations in EBITDA (it’s a business still in it’s infancy that is investing heavily in operations), increasing net margins, and they’re starting to learn how to better manage farms from each passing year. Stock rotation cycle is growing though I suspect that may be also due to geopolitical instability and also due to them wanting to keep on to inventory and sell it when market may demand a higher price. Looks good to me?
P/E is higher than tech stocks (lol) but P/BV and P/S seem particularly juicy to me.
Combining this with their approach of acquiring farms for basically no money down and paying it down over 7 to 10 years I think this will company will massively appreciate in terms of book value alone, regardless of market fluctuations. Should they execute on their business plan, this should print - but regardless, these numbers suggest a cool entry point should you believe in their vision for the next 10 years.
I mean they bought a 10M euro farm with 50k in upfront cash. Should they pay it off in 7-10 years, that’s already 30% of it’s current market cap, and their rate of return on capital would likely be insane. From 50k euros to 10M in 7-10 years and paying off the debt with corn produced by said farm? With the ability to then sell it 10 years down the line?
Sign me the fuck up lol.
I’m actually quite excited to see this sort of model explored in our local stock market, traditionally reserved for state enterprises. Since HAI, there’s been a rebounding interest towards both REITs and agriculture on the AeRO stock market - including Norofert, ONE United Properties, Agroland, Grup Serban Holdings and likely a few others I’m missing.
Want me to cover one in particular? Just drop me a line - I’ll be sure to cover them as I’d like to own bits and pieces of likely all companies in the AeRO index, depending on how fast I get $.