Appendices Land value
All agricultural enterprises in Ukraine lease the land they operate. A moratorium on the sale of agricultural land was set by parliament more than a decade ago and has been prolonged every year since.
The average size of for a leased plot is 1.5 ha, which implies a 100 ths ha landbank requires around 60k lease contracts. To expand their landholdings, large agricultural companies usually purchase small leased landbanks of 5-30 ths ha, paying USD 250-1,500 per ha for lease right (we estimate the current average at USD 500/ha).
Target EV/ha NEED TO EXPLAIN WHY “TARGET” EV/HA IS IMPORTANT
We use Ukraine`s average target EV/ha as a starting point in our asset-based valuation of the companies. To arrive at target EV/ha of USD 1,600/ha for large farming companies with average land quality, we sum up three components (all Concorde Capital estimates):
Value of lease rights: USD 1,200/ha
Machinery: USD 200/ha
Working capital: USD 200/ha at year end
To estimate the value of lease rights, we treat account for the option to buy the land when it becomes tradable since (according to draft legislation) current leaseholders are expected to have a pre-emptive purchase right unless a higher bid appears.
To arrive at our estimate for the value of lease rights of USD 1,200/ha, we make two principal assumptions:
Current leaseholders, as holders of pre-emptive purchase rights, will be able to buy land at 50% of the fair value, because of negotiating power and the difference in fair value for large-scale company and a small farmer, caused by differences in the access to the capital, machinery and management practices- WHY?
The current fair value of average Ukrainian agricultural land is USD 2,400/ha (assuming large-scale operations)
Assumed value of land
We arrive at a fair value for agricultural land of USD 2,400/ha via three different methods that yield similar results:
Farmland value, USD/ha |
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Source: Concorde Capital estimates |
Current landowner income capitalization model
Landowner, typically individual farmers with 1.5 ha plots, have two options: lease their land at an average of USD 75/ha p.a. or farm it themselves. We deem leasing preferable as we do not think farming such small land plots can be a breakeven venture. Should land become tradable, landowners will have an option to sell the land thus his opportunity cost will amount to deposit rate on the proceeds from the sale of the land. We take the average deposit rate for USD denominated deposits of 7.5% in May 2012 from National Bank of Ukraine WHY USD NOT UAH? TRANSACTIONS WILL HAVE TO BE EXECUTED IN UAH? as an opportunity cost and consequently a discount rate for current landowners. Applying our view on average annual lease payments, we calculate NPV of USD 2,370/ha for current landowners.
NPV, USD/ha
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2012E |
2013E |
2014E |
2015E |
2016E |
2017E |
2018E |
2019E |
2020E |
2021E |
Cash flow (lease income), USD |
75 |
90 |
105 |
113 |
116 |
120 |
123 |
127 |
131 |
135 |
Yoy |
33% |
20% |
17% |
7% |
3% |
3% |
3% |
3% |
3% |
3% |
Discount rate (USD deposit rate) |
7.5% |
7.5% |
7.5% |
7.5% |
7.5% |
7.5% |
7.5% |
7.5% |
7.5% |
7.5% |
Sum of disct'd CF's |
810 |
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Terminal Value |
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2,990 |
Perpetuity Growth Rate |
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3.0% |
Disct'd TV |
1,559 |
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NPV |
2,370 |
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Source: Concorde Capital estimates