When investing I think it’s a good strategy to stick to the best ASX share ideas, why go with your 40th best idea?
Some of the things I look for when buying shares are: earnings growth of the company, growth of the industry it operates in, increasing dividends, good management, fairly defensive and that it’s good value.
Vitalharvest Freehold Trust (ASX: VTH)
Vitalharvest is a real estate investment trust (REIT). It’s one of the few agricultural REITs on the ASX. The farms it currently owns are predominately citrus fruit and berries, which are all leased to Australian horticultural giant Costa Group Holdings Ltd (ASX: CGC). It has a profit-share agreement with Costa where it receives 25% of the operational profit from those farms.
The farms’ variable profit share earnings of $7.7 million was the joint lowest since FY14 due to crumbly raspberries and fruit flies near the citrus farms which required additional cleaning (and costs).
But if those variable earnings were to be the same as the next lowest amount ($8.2 million in FY14) then Vitalharvest would see a 6.5% increase.
Vitalharvest earns a fixed 8% rental income on its cost base as well. Each year that Vitalharvest spends money on the farms it boosts that fixed rent, plus should hopefully boost the profit the farm makes.
The REIT was only listed for 11 months in FY19, so in FY20 shareholders will earn an extra month of rental.
So What’s The Big Deal?
Well, in a tough operating year Vitalharvest paid a distribution 5.65 cents, amounting to a current yield of 6.3%. An extra month of earnings could see FY20’s yield climb to around 7%. If the variable rent recovers it could go even higher.
Unlike most other REITs like Goodman Group (ASX: GMG) and Arena REIT No 1 (ASX: ARF), Vitalharvest has not seen its share price rocket during 2019 to values far in excess of its balance sheet valuation.
In-fact, when you take Vitalharvest’s water entitlements at market value it has a value of $1.04, meaning at $0.90 it’s valued at a 13.5% discount.
Global demand for food is going to keep rising with a bigger population, Asian middle class demand for quality Australian produce is going up and climate change could cause the amount of usable arable land to fall over the next decade.
Summary
So, Vitalharvest is steadily growing its base rent and the variable rent should increase, leading to growing distributions, it’s defensive and I think it looks good value. It essentially ticks all my boxes.
The reliable shares in the free report below also tick my boxes too, and I’ve got my eye on them.
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Disclosure: Jaz owns shares of Vitalharvest and Costa Group Holdings at the time of writing, but this could change at any time.
