KPT has been a phenomenal investment, a
great investing lesson and if plans materialise will be a positive economic
boost for Kangaroo Island and South Australia.
Kangaroo Island (KI) is located in South
Australia (130km south of Adelaide) and is famous for its ecotourism including
Seal Bay, marine life and a quiet get-away retreat. The tourism hot spots are
located on the far western, southern and eastern sides of the island with the
central and northern side typically used for agriculture. KI is quite big:
155km wide and 55km long and at times it actually feels quite remote driving
through the centre. The population of over 4,000 (2006) is located mostly on
the eastern side around the towns of Penneshaw and Kingscote. Sealink provides
the ferry from Penneshaw to the mainland at Fleurieu Peninsula.
It also turns out that KI has exceptional
growing conditions for timber. A high, consistent rainfall combined with mild
summers and low salinity allow timber to grow quickly. The faster you can grow
timber, the cheaper it is to produce and KI finds itself among the lower costs
timber producers in the country.
During the timber Managed Investment
Scheme (MIS) heyday, various timber companies bought lots of land on KI and
around the country and planted timber. These were tax and commission motivated
structures that ultimately failed and the likes of Great Southern Plantations
and Gunns went bankrupt.
The main problem unique to KI is that it's
an island and there has been no economical way to get the timber off the island
and as the ferry service is located on the eastern side at Penneshaw, it is
right smack bang in the middle of the tourist area - not exactly ideal for a
logging route.
The combination of these factors caused
the prices of timber plantation on KI to crater, which in turn have
created serious opportunity.
Out of the rubble, KPT emerged with 30% of the planted
timber on KI, along with New Forests with 60% and individuals
collectively hold the remaining 10%. I had the good opportunity to uncover this
opportunity back in June 2014 when I discussed the situation at length with the
great Fred Woollard from Samuel Terry Asset Management, who is the major shareholder in KPT. KPT
was then $3 (a fraction of land value alone) and given it is now $27.20, it's
fair to say I owe him one (I thought MNY was a good return tip, but a double is
not quite as good as an 8 bagger).
KPT has now positioned itself as the
leading timber producer on KI with the recent agreement to purchase New Forests’
KI assets. This deal is phenomenal for KPT shareholders as the purchase price
for the land and timber is cheap and crucially ensures KPT owns both potential
sites for a second wharf.
Getting control of both potential wharf
sites is key: the government, recognising the need for a solution to export the
timber to reinvigorate the economy, indicated only one approval will be given
for a second site. KPT owns both Smith Bay and now Ballast Head (owned by New
Forest). Smith Bay even contains a house which you can rent on Stayz.com.au. A
picture of the site is shown below (note the buoy which is being used to test
currents to determine wharf requirements):
So, KPT has now lodged a DA for the second
wharf and if the approvals are given, the potential value accretion is enormous
- despite the stock having already moved up so much. Slide 24 of the recent
presentation (26/10/16) gives you some idea of what the business might be worth
once the second wharf is built. As the owner of 58,000 acres of land (which
ought to increase in value), a sustainable timber business generating in the
order of $20m EBIT p.a. and a wharf owner, the potential upside is multiples
from here.
However, there will be another time for
discussing the upside - I wanted to write this post to commend the major
shareholders and management. Up until now, the board has not received much cash remuneration but has been paid mostly in shares (which they stand to become rich from).
We've seen too many companies run by the wrong people: it's easy to get seduced
(I have) by cheap stocks, but you also need the right managers with the right
incentives to unlock and create value. KPT has been exemplary in working with all
stakeholders: residents, environmentalists, government and shareholders and
have set the benchmark to judge other companies.
Kristian
Disclosure - own KPT and MNY
