ALCO - Alico: Looking Forward To The Next Harvest

2023-09-17 05:06:50 ET

Summary

• Alico reports a decline in revenues due to damages caused by Hurricane Ian, but net income is not severely affected thanks to crop insurance payouts.
• The company remains hopeful for disaster relief funds and expects the upcoming 2023-24 harvest to show substantial recovery.
• Alico sees continued interest in its ranch lands and may have valuable real estate assets that could increase the overall value of the company.

It has been a few months since I last covered Alico ( ALCO ), and with the company recently reporting Q3 earnings, I believe it is timely to revisit the Alico story and see if there are any recent developments worth mentioning.

Brief Company Overview

Alico, Inc., for those not familiar, is one of the largest citrus growers in the U.S. responsible for supplying fruit for Tropicana juices. The company owns 74,000 acres of land, including ~49,000 acres of prime citrus acres. Alico also sells parcels of Alico Ranch lands to developers in order to surface value for shareholders (Figure 1).

Operations Still Recovering From Hurricane Ian

As I have written in past articles, Alico's operations have been negatively affected in the past year due to damages caused by Hurricane Ian, which devastated Florida in September 2022. Although direct damages to Alico's citrus groves were limited, the hurricane caused early fruit drop on many of Alico's citrus trees, reducing the current 2023 harvest. Financially, we can see 2023 is basically a write-off year, as Alico is experiencing a 57% YoY decline in revenues to only $39.2 million for the 9 months to June 30, 2023.

However, the decrease in net income was not as severe, with Alico reporting $0.9 million in net income YTD vs. $33.5 million in the prior year, as the company benefited from $21.4 million in crop insurance payouts.

The extent of the hurricane damage is more apparent when we look at the operational results of the Citrus segment, as Alico's fruit harvest declined by over 50% in terms of boxes harvested (Figure 3).

However, Alico's operating results were actually better than the industry, as the USDA estimates the Florida citrus crop declined by 61.5% YoY.

Insurance Proceeds Help Weather The Storm

As mentioned above, fortunately for Alico, the company maintained crop insurance on all of its groves. So far through June 30, 2023, insurance proceeds have totaled $22.2 million, with an additional $0.3 million received after fiscal Q3/2023 ended, helping the company literally 'weather the storm'.

Looking forward, Alico remains hopeful that it may be eligible for disaster relief funds that were earmarked in the most recent Consolidated Appropriations Act that was passed into law in December 2022.

As a point of reference, after Hurricane Irma struck Florida in 2017, federal disaster relief funds were eventually disbursed to citrus growers like Alico, so the company is hopeful it may be eligible for relief this time as well.

Management Cautiously Optimistic On 2024 Harvest

Historically, it takes two or more seasons for citrus production to recover from a storm like Hurricane Ian. However, with Alico's outstanding grove management practices and the planting of more than 1.7 million trees beginning in 2017, management is cautiously optimistic that production will recover substantially in the upcoming 2023-24 harvest (Figure 4).

Looking forward to the 2023-24 harvest season, management expects steady fruit pricing compared to the current season. Furthermore, Alico has the majority of its fruit under contract and has extended its Tropicana contract through the 2024-25 season, with improved pricing.

Alico Sees Continued Interest In Ranch Lands

Consistent with recent quarters, Alico continued to see strong interest in parcels of the Alico Ranch land. In the most recent quarter, Alico sold 548 acres for $2.7 million in gross proceeds or $4,900 / acre (Figure 5).

With approximately 18,000 acres of ranch lands remaining, I estimate Alico's ranch lands are worth $4,000 / acre or $72 million.

Importantly for investors, management remarked in the latest quarterly earnings release that a long-term study conducted by land-use planning professionals is expected to conclude by the end of this calendar year and is expected to help the company optimize the development potential of Alico's vast real estate assets. I am cautiously optimistic that my estimate of Alico's ranch lands is on the low side, as Alico may be holding onto some valuable real estate in Florida.

For example, in the company's investor presentation, Alico mentions that the company had an opportunity to acquire 85 acres of land in Florida's Labelle county where adjacent land was sold to build a Walmart at $98,000 / acre in 2015 (Figure 6).

If Alico can systematically review its real estate holdings and consistently identify real estate development opportunities like the Walmart transaction mentioned above, then there is vast potential realize more than $4,000 / acre in value for the ranch lands.

Updated Sum Of The Parts

Upon further research, it appears my sum-of-the-parts ("SOTP") valuation model may be undervaluing Alico's citrus groves by assigning a value of $8,000 / acre, as current listings of Florida citrus groves range from $8,700 to $40,000 / acre. Therefore, I am conservatively raising my per acre value of Alico's citrus groves to $9,000. The updated SOTP valuation increases to ~$51.50 / share, or more than 100% above the current share price (Figure 7).

Risks

With insurance recoveries, fiscal 2023 looks increasingly like a breakeven year, which is probably a best-case scenario for investors. However, the hurricane season is not over yet, as we recently saw Hurricane Lee hurtling up the East Coast towards New England.

As long as Alico can avoid another damaging hurricane in the next few months, I believe an operational rebound is likely for the 2023/24 harvest.

In fact, management commented on the Q3 earnings conference call that although they cannot quantify the upcoming 2023/24 harvest, visual inspection of the groves suggest there were no permanent damage from Hurricane Ian and management does not have any reasons for concern.

Conclusion

Insurance payouts have helped boost Alico's financials to a breakeven for the 9 months to June 30, 2023. While Q4 is expected to be poor, the 2023/24 harvest is shaping up nicely as there does not appear to be any permanent damage to Alico's groves from Hurricane Ian and 1.7 million additional fruit trees that the company have planted since 2017 start to mature.

I continue to see significant SOTP value in Alico's shares and reiterate my speculative buy rating.

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