Three Acre Farms (TAFL) - The Golden Egg !!!

Three Acre Farms rewarding the shareholders more than ever before. Time to enter the 300 club but are you ready !!! 

Background

Principal business activities of Three Acre Farms PLC (TAFL) are Poultry Farming and Sale of day old Chicks

Financial Performance

TAFL's revenues were fluctuating during the last five years due to changes in the consumer demand time to time. However from 2020 onwards the revenue is expected to grow due to expected increase in demand for poultry products. Revenue to grow from LKR 2.5Bn in 2019 to LKR 3.1Bn in 2021 by a CAGR of 11%. 

Despite revenue fluctuations earnings (profits attributable to shareholders) seems to be growing since 2017. Company recorded LKR 654Mn in 2017and reached to LKR 773Mn in 2019.

9 months ending 30th September 2020 the company reported a revenue of LKR 2.0Bn and a profit attributable to shareholders of LKR 0.6Bn. Given that Q4 is normally the best quarter for the company I expect TAFL to record a revenue of LKR 855Mn and a profit of LKR 276Mn making the total revenue for FY 2020 to LKR 2.8Bn and a profit of LKR 0.9Bn. This translates to a forecasted EPS of LKR 37.2. The most attractive feature in TAFL's P&L is their NPAT is higher than gross profit due to significant interest income earned from cash equivalents.

Ratio Analysis

TAFL's 2020 forecasted ratios are as follows.

EPS - LKR 37.2

NAV - LKR 204

ROE - 18%

At a market price of LKR 228 (as at 19th February 2021) the stock was trading at a forward PE of 6.1x and a forward PBV of 1.1x. TAFL share price was trading in the PE range of 3x to 5x during 2015-2019 period and in the PBV range of 0.6x to 1.7x. Given the much improved condition for equity investments @ CSE now we can see the above valuation parameters are improving and going to make new highs. The good ROE indicates the earnings capability of TAFL now exceeding the returns investors can earn by investing elsewhere such as T-Bills and T-Bonds.

Dividends and cashflows

Since 2015 TAFL was identified as a company with strong balance sheet and cashflows. In 2019 TAFL generated a net cashflow of LKR 643Mn and during the 9M of 2020 it has generated a net cashflow of LKR 519Mn making the total cash and cash equivalents as at September 2020 to LKR 3.1Bn. TAFL DPS was increasing consistently from LKR 2.1 in 2015 to LKR 5.5 in 2019. In 2020 TAFL has declared a first interim dividend of LKR 5.5 and surprisingly announced a second interim dividend of LKR 11.0 making the total for 2020 to LKR 16.5. This surprise move has given a hint to the investors as to what plans were in mind of TAFL's management with regard to the cash pile up. This second interim dividend is likely to give the green signal of TAFL changing their dividend policy in future and may be to distribute about 50% of the earning in the year to come, may be there are chances for another hefty one-off dividend if the management wishes to follow the path set by Chevron Lubricants some time back. With the management moving more towards distributing cash via dividends the pile up on retained earnings will gradually go down making the return on equity (ROE) of the company to increase gradually in the years to come.

Financial forecast 2021

Revenue is expected to further improve in 2021 mainly due to resumption of tourism in Sri Lanka and easing off from covid 19 impact. So a 10% increase YoY will give them a revenue of LKR 3.1Bn and a bottom line of LKR 940Mn which will be the highest for the last seven years. Expected EPS would be LKR 39.9 with a dividend of LKR 18.8.

Valuation

TAFL was trading at a price of LKR 228 as at 19th February 2021. This was at a forward PE of 6.1x given 2020F and a forward PBV of 1.1x. With the 2nd interim dividend the DY is now 7.2%. The Food, Beverage & Tobacco sector valuation parameters as at 19th February were,

PE ratio - 16.0x

PBV ratio - 2.7x

DY % - 3.5%

If TAFLs 2020F valuation matrices applied to these sector ratios then the estimated values of a stock of TAFL would be;

PE based - LKR 595

PBV based - LKR 550

DY based - LKR 471

Based on dividend discount valuation method ( with estimated data set of market return (15%), risk free rate of (5%), TAFL beta value of 1.55 & cost of equity (20.5%) based on CAPM model) TAFLs stock price would be LKR 289.

So on average TAFL share price would be LKR 476. If we set a side 25% of this for market inefficiency and other factors TAFL stock can be valued @ LKR 357 with a future upside potential of 57% to the current market price. 

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