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Produce Investment (PIL.L) is a vertically integrated potato farmer.  They grow and process potatoes for major supermarkets.  In particular, they produce Jersey Royal Potatoes.

They trade at a forecast PE of 6.  They have a free cash flow yield of about 10%.  The net tangible asset value is about £35m against a market cap of £40m.

The tangible assets are all real assets  – summary as at YE 2016is

  • £34m  Buildings / Plant / Freehold Land
  • £8.8m Inventory
  • £19.7m Potatoes for planting next year
  • £30.4m Receivables

Liabilities are £63m(correction 29/12/2016 did read 51m ) of which £7.2m is a pension liability.

Bit concerned so much of the assets are potatoes for planting but still a strong balance sheet.

Customers are big supermarkets – so obvious pressures on prices.  On the other hand Jersey royal potatoes have a protected designation of origin from the EU – nowhere else can make them and they are known and asked for by name in the UK – first new potatoes of the season (probably doesn’t make sense if you are not British).

Good factsheet here.

I think these could easily be a target – £40m isn’t much for an acquirer, diversification is sensible in agribusiness – a bigger business could easily carry a bit more leverage – evening out good years and bad years across crops.  They say they may acquire other businesses – never a positive for me but at this sort of price I will tolerate it.

CEO and CFO both resigned, new guy 454,545 options which pay out if the share price is  £2.20 over 65 days – a 45% increase in price.  I actually don’t mind management making money if I make money too…  They are sensibly paid.

As an agricultural company years with poor production tend to result in better prices – best indication to me is that 2016/7 is going to be a decent year.  2014/5 was terrible.

Best information I can find on this is here:

https://potatoes.ahdb.org.uk/knowledge-hub/newsletters/potato-weekly

As ever with companies that own land possibility for planning permission and a large uplift if they can build houses – not done any real investigation into this though…

Risks are – leaving the EU labour costs may rise.  I have looked into this and tried to work out impact – I don’t think it will be much – some potato harvesting is mechanised.  Further I have tried to break down total labour cost as best I can with the little information I have available, lots of this is not low skilled minimum wage stuff…  Even if labour costs rise (and its a big if) I suspect prices will adjust.

They had a product recall at the end of 2015 which I suspect held the share price back a touch…

Shareholders are nicely dispersed – 23.5% management – enough held by others to challenge them…

Bought a 6% portfolio weight.  Hope for either a re-rating or a take over offer… Target £3.00…

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