Shares digital

Australian agricultural investor Radicle Projects (RDP:AIM) will more than double pre-tax profit in the next two years, according to the maiden earnings forecasts on the company. House broker Charles Stanley has published its first research report on Radicle, predicting that profit will hit £2.5 million in 2009 against £1.2 million made last year.

As we recently flagged up (Shares, 13 Dec ’07), Radicle made good progress late last year with investments in forestry and almond plantations.

The manager of its hardwood project went into administration but Radicle resolved the situation by exchanging for a more mature and larger forestry asset. This is ready to harvest four years earlier than the original investment, prompting Charles Stanley to forecast cashflow from 2009 instead of 2012.

In addition to harvesting silk oak, a wood used for cabinet making, part of its forestry assets include she-oak. This can be harvested every two years and used to make biofuel or wood pellets as fuel for boilers.

Radicle’s hardwood investments offer further commercial opportunities, notes the company’s broker. It says the Paulownia trees on site are fast growing and have broad leaves that are efficient for absorbing carbon dioxide, making the forestry project suitable to become a designated ‘carbon sink’. Such assets are used for investment by producers of carbon dioxide and other noxious gases as a way of purchasing carbon credits to offset their harmful emissions.

Shares in Radicle have hovered around the 60p mark since its results in December. ‘We have $3 million worth of trees ready to harvest,’ says chief executive Tim Bennett. ‘The market hasn’t realised this.’

A string of imminent announcements should act as a catalyst for increasing the share price. Radicle is expected to announce plans next month to put its forestry assets into a closed investment vehicle which it would manage. Charles Stanley believes it could adapt this model for all of its cash-generating assets, saying it would ‘enhance both the potential growth profile and quality of earnings’ for the business.

With forestry accounting for 80% of its funds under management, Bennett said several acquisitions would be made over the coming months to diversify Radicle’s portfolio. This may include increasing its investments in almond and olive plantations and vineyards, easily funded by the £14 million cash sitting in the bank. Ben Archer of Charles Stanley reckons Radicle will spend at least £5 million by the 30 June, its financial year end.

The broker forecasts pre-tax profit falling a third to £800,000 for the current trading period on 2007, weighed down by interest payments on convertible loan notes. Nevertheless, investors are still in line to get a 7.8p dividend yield, rising to 8.7p in 2009.

Shares says: Highly attractive given that cash generation is only around the corner. Worth considering the risks of underperforming crop yields diluting its earnings, but a gamble worth taking.