ALCO - Alico: Reiterate Buy For Long-Term Investors

2023-05-08 21:11:28 ET

Summary

• Alico is one of the largest citrus growers in the U.S with ~49,000 acres of citrus groves in Florida.
• Hurricane Ian has made Alico's F2023 a writeoff.
• The stock continues to trade at roughly half of real estate value, suggesting patient investors will eventually be richly rewarded.

As expected, Alico, Inc.'s ( ALCO ) operations have been negatively affected by Hurricane Ian, with the company reporting operating losses so far in F2023. I expect operating losses to continue until we roll forward to the next harvest.

However, on the positive side, the company is starting to realize insurance payouts related to Hurricane Ian, which is helping to offset operational losses. Furthermore, Alico continues to see interest in parcels of Alico Ranch at attractive valuations.

My SOTP valuation continues to see significant upside in Alico's shares, as long as we can get through 2023 without further catastrophes. I continue to rate ALCO stock a speculative buy.

Brief Company Overview

For those not familiar, Alico, Inc. is one of the largest citrus growers in the U.S. and supplies fruit for Tropicana juices. The company owns and/or manages 83,000 acres of land in eight Florida Counties (Charlotte, Collier, DeSoto, Glades, Hardee, Hendry, Highlands and Polk). Most of Alico's revenues are derived from tending ~49,000 acres of owned citrus groves and ~7,000 acres of citrus groves for third parties. In recent years, Alico has also been selling parcels of Alico Ranch lands to third parties to reduce debt and fund capital returns to shareholders.

Fiscal 2023 Weak As Expected

In my prior article , I warned that 2023 will be a writeoff year due to the negative impacts from Hurricane Ian, and H1/2023 results were certainly weak as expected.

For the six months ended March 31, 2023, ALCO reported a net loss of $10.9 million or -$1.44 / share, compared to net income of $30.8 million or $4.08 / share in the prior period of fiscal 2022 (Figure 1).

Poor financial performance in fiscal 2023 is explained by decrease in revenues due to reduced fruit production as Hurricane Ian caused accelerated fruit drop, in addition to increased costs of fertilizers, herbicide, labour and fuel.

Operationally, Alico's fruit harvest declined by 45% YoY on a boxes harvested basis, and -47% YoY on a pounds solid produced basis for the six months ended March 31, 2023 (Figure 2).

Alico's performance is actually better than the industry, as management commented that the USDA Citrus Crop Forecast estimates a 61% decline in Florida Orange box production compared to the prior year.

Insurance Starting To Pay Out

As I mentioned in my prior article, while Alico maintains catastrophic crop insurance on its citrus groves, there is often a long lag between a catastrophe and insurance payouts.

In the quarter ended March 31, 2023, Alico received $4.8 million in crop insurance claims, while subsequent to quarter end, Alico received an additional $8.9 million in insurance proceeds. Alico has additional claims pending and may receive additional insurance payouts in the coming months and quarters as the company works with insurers and adjusters to determine the remaining amount of insurance recovery the company may be entitled to.

Furthermore, in December 2022, the federal government passed into law the Consolidated Appropriations Act with funds for disaster relief. Although the mechanics of the funding is unclear, Alico continues to work with Florida Citrus Mutual, the industry trade group, and government agencies to determine whether the company may be eligible for disaster relief.

Alico Continues To See Interest In Ranch Lands

While the Citrus business is a writeoff in 2023, Alico continues to see interest in its vast ranch lands, selling approximately 888 acres in the fiscal year to date for proceeds of $4.9 million. On a per acre basis, Alico's ranch land sales in 2023 were over $5,000 / acre, the highest in the past 2 years (Figure 3).

With approximately 19,000 acres of ranch lands remaining, I conservatively estimate the ranch lands are worth $4,000 / acre or $76 million.

Updated Sum Of The Parts

Updating my sum-of-the-parts ("SOTP") valuation of Alico for the reduction in ranch lands available for sale offset by increased price per acre, the SOTP value of Alico remains little changed at approximately $48 / share or 88% above the current share price (Figure 4).

Risks

Operating results in fiscal 2023 continues to be the biggest risk to Alico, as shown by the operating losses in the first two quarters of the year. However, all things considered, Alico's net loss of $1.44 / share in H1/2023 was better than expected, given my expectations of a writeoff year.

As long as Alico can minimize losses in 2023, I believe an operational rebound is possible for the fiscal 2024 harvest, although management cautiously believes it may take more than 2 years for its groves to fully recover from Hurricane Ian.

Conclusion

As expected, Alico has been reporting operating losses so far in fiscal 2023 due to the negative impacts of Hurricane Ian. Operating losses should continue until we roll forward to the 2024 harvest.

On the positive side, Alico is starting to realize insurance payouts related to Hurricane Ian, which helps to offset the operational losses this year. Furthermore, continued sales of Alico Ranch lands continue to bring in much needed cash flow.

My SOTP valuation continues to see significant upside in Alico's shares, as long as we can get through 2023 without further catastrophes. I continue to rate ALCO a speculative buy.

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