Investment Memo: Warakirri Cropping

Company overview

Established in 1996, Warakirri Cropping is one of Australia’s largest grain producers. The company owns and operates 11 large-scale productive farms spanning 155,000 hectares in four states, and harvests more than 400,000 tonnes of grain every year.

Business Model

Warakirri Cropping focuses on:

• Operations of crops: wheat, barley, chickpeas

• Rainfed farms, relying only on natural rainwater rather than irrigation

• Implementing technology: high-tech, camera-guided sprayers that precisely target weeds from crops when spraying

  • This cost-cutting technology reduces the use of chemical sprays by up to 90% compared to a conventional machine that sprays the entire field

• Implementing sustainable farming practices to improve soil health and productivity

  • Nitrogen is a powerful and effective ingredient in fertiliser. But some of it can escape the soil and contaminate water sources or enter the atmosphere, where it acts as a warming greenhouse gas. At its Lobethal farm east of Esperance WA, the Warakirri Cropping team works to limit nitrogen escape by applying the precise amount of nitrogen required for optimal crop growth

  • Also at the Lobethal farm, trials were conducted in the 2023 winter crop of a new fertiliser that releases less nitrous oxide, another potent greenhouse gas

  • At Orange Park and Cowabbie-Mukorra in southern NSW, crop stubble is kept on the soil surface after harvest instead of being burnt off. This improves the soil for the next crop, reduces water loss, and can increase grain yield by 10%

Industry Investment Thesis

• The agriculture sector presents a compelling thematic investment opportunity driven by the increasing global demand for food and the need for sustainable farming practices

• As the world population continues to grow, reaching an estimated 9.7 billion by 2050, the demand for agricultural products is expected to increase by 70%

  • By 2050, it’s estimated that the world will need to produce up to 54% more food, feed, and biofuels than in 2012 to feed a projected global population of 9.7 billion people. Current farming as we know it is unlikely to meet that demand.

• This growth, coupled with challenges such as climate change, water scarcity, and soil degradation, creates a pressing need for more efficient and sustainable agricultural practices.

• From a non-thematic, financial perspective, investment in agriculture presents an opportunity for:

  • Long-term investment returns

  • Low correlation with the returns of more traditional asset classes and therefore diversification benefit

  • Hedge against inflation

  • Portfolio stability during periods of market volatility

• By investing in agriculture, we aim to capitalise on the sector's profile while contributing to global food security and environmental sustainability

Market Analysis

• Total Addressable Market (TAM): The value of U.S. farmland was estimated at $2.7 trillion in 2020, with only about 2% owned by institutional investors, indicating significant room for growth

• Market Trends: Increasing global food demand, shrinking arable land per capita, and growing interest in farmland as an inflation hedge and portfolio diversifier

• Competitive Landscape: Major players include GrainCorp, Glencore and Cargill

• Entry Barriers: High capital requirements, need for specialised knowledge in both agriculture and real estate, and the importance of local relationships create significant barriers for new entrants

Summary Financials

• Revenue Streams: Cash rent leases (80% of revenue) and crop-share agreements (20% of revenue)

• Investment Criteria: Minimum 5% initial cash yield, with potential for yield improvement to 7-8% within 3 years

• Value Creation: Land improvements, strategic acquisitions, and implementation of precision agriculture techniques

• Exit Strategy: Individual property sales, portfolio sales to institutional investors, or potential REIT conversion

Historical and Projected Financials

ONE

## Revenue Growth

Analysis:

- The company has demonstrated strong historical growth of 50% year-over-year.

- Projections show a gradual slowdown in growth rate, which is typical as companies scale.

- The projected growth rates remain impressive, indicating continued strong market demand and effective execution.

- The decreasing growth rate suggests a maturing product and market, but still with significant room for expansion.

## Gross Profit and Margin

Analysis:

- Gross margin has been steadily improving, indicating economies of scale and/or pricing power.

- The projection of continued margin improvement, albeit at a slower rate, suggests ongoing operational efficiencies and a strong market position.

## EBITDA and EBITDA Margin

Analysis:

- EBITDA has grown faster than revenue, indicating improving operational efficiency.

- The historical doubling of EBITDA margin every year (10% to 20% from 2021 to 2023) is impressive.

- Projected EBITDA margins show continued strong improvement, reaching 45% by 2028.

- This trend suggests the company is successfully scaling its operations and controlling costs while growing revenue.

## Implied Operating Expenses

While not explicitly stated, we can infer operating expenses by subtracting EBITDA from Gross Profit (assuming Depreciation & Amortization (D&A) = zero, which may not be the best assumption since agri companies typically have significant D&A expenses due to investments in equipment and possibly acquisitions. Ignoring D&A can lead to underestimation of total operating expenses and overestimation of operating efficiency.):

- 2021: $7.5M (50% of revenue)

- 2023: $15.8M (47% of revenue)

- 2025 (Projected): $26.4M (40% of revenue)

- 2028 (Projected): $39.9M (27.5% of revenue)

Analysis:

- Operating expenses as a percentage of revenue are decreasing over time, indicating improving operational efficiency.

- This trend supports the projected increase in EBITDA margins.

- The company appears to be successfully leveraging its fixed costs as it scales.

## Overall Financial Health Indicators

• 1. Growth Stage: The company is in a high-growth phase, with strong revenue increases and improving profitability metrics.

• 2. Scalability: Improving gross and EBITDA margins indicate a scalable business model, typical of successful SaaS companies.

• 3. Operational Efficiency: The company is demonstrating its ability to control costs while growing rapidly, as evidenced by the expanding EBITDA margin.

• 4. Market Acceptance: Sustained high growth rates suggest strong market demand and successful customer acquisition.

• 5. Financial Trajectory: The projections show a path to high profitability, with EBITDA margins expected to reach 45% by 2028.

• 6. Investment Potential: The financial metrics support the case for investment, showing strong growth and improving profitability.

## Potential Risks and Considerations

• 1. Growth Sustainability: The projected slowdown in growth rate should be monitored. It's important to understand the factors that will drive continued growth.

• 2. Market Saturation: As growth rates decrease, it's crucial to assess the remaining addressable market and potential for new product lines.

• 3. Competition: High margins may attract competition. The company's ability to maintain these margins should be critically evaluated.

• 4. Execution Risk: Achieving the projected improvements in margins and maintaining growth will require excellent execution.

• 5. Economic Sensitivity: The agriculture sector can be sensitive to economic cycles and climate events. The impact of these factors on the company's projections should be considered.

Valuation and Expected Return

• Valuation Analysis:

  • Discounted Cash Flow (DCF) analysis

  • Comparable Company Analysis

  • Precedent Transactions Analysis

• Valuation Summary: Provides a range based on different methodologies

• Investment Structure and Returns Analysis: Outlines the proposed investment and calculates potential returns under different scenarios

• Recommendation: Offers a final recommendation based on the analysis, highlighting key merits and risks

Valuation Analysis

V1. Discounted Cash Flow (DCF) Analysis

Assumptions:

- Projection period: 5 years (2024-2028)

- Terminal growth rate: 3%

- Discount rate (WACC): 12%

Step 1: Project Free Cash Flows

TWO

Step 2: Calculate Terminal Value

Terminal Value = FCF2028 * (1 + g) / (WACC - g)

= 30.5 * (1 + 0.03) / (0.12 - 0.03)

= $345.7 million

Step 3: Discount FCF and Terminal Value

THREE

Step 4: Calculate Enterprise Value (EV)

EV = Sum of PV of FCF + PV of Terminal Value

= 45.1 + 196.0

= $241.1 million

Step 5: Calculate Equity Value

Equity Value = EV - Net Debt

= 241.1 - (-10) (company has $10m in net cash)

= $251.1 million

V2. Comparable Company Analysis

FOUR

Applying these multiples to AgriTech Solutions' 2024E financials:

EV/Revenue: 4.5x * $47.3m = $212.9m

EV/EBITDA: 18.0x * $11.8m = $212.4m

Average EV from comparable analysis: $212.65m

V3. Precedent Transactions Analysis

FIVE

Applying these multiples to AgriTech Solutions' 2023A financials:

EV/Revenue: 5.0x * $33.8m = $169.0m

EV/EBITDA: 22.0x * $6.8m = $149.6m

Average EV from precedent transactions: $159.3m

Valuation Summary

SIX

NOTE with the net cash figure:

The Equity Value may differ from this Enterprise Value range depending on the company's actual net debt or cash position, which should be determined through due diligence.

Importance in Investment Decision

Understanding the company's cash position is crucial for several reasons:

1. It impacts the final equity valuation.

2. It provides insight into the company's liquidity and ability to fund operations and growth.

3. It may influence the structure of the investment (e.g., primary issuance for growth capital vs. secondary for partial exit of existing shareholders).

Next Steps

To resolve this issue and refine the valuation:

1. Request a recent balance sheet from the company to determine the actual cash and debt positions.

2. Adjust the equity valuation based on the net debt/cash position.

3. Consider how the cash position aligns with the company's projected cash needs for achieving its growth targets.

Investment Structure and Returns Analysis

Proposed Investment: $50m for 25% equity stake (post-money valuation of $200m)

Expected Returns:

1. Base Case: Exit in 5 years at 20x EBITDA multiple

Exit Value = 20 * $65.4m = $1,308m

Equity Value = $1,308m + $60m net cash - $0 debt = $1,368m

Investor's Share = 25% * $1,368m = $342m

Multiple of Invested Capital (MOIC) = $342m / $50m = 6.84x

IRR = 46.8%

2. Upside Case: Exit in 5 years at 25x EBITDA multiple

Exit Value = 25 * $65.4m = $1,635m

Equity Value = $1,635m + $60m net cash - $0 debt = $1,695m

Investor's Share = 25% * $1,695m = $423.75m

MOIC = $423.75m / $50m = 8.48x

IRR = 53.3%

3. Downside Case: Exit in 5 years at 15x EBITDA multiple

Exit Value = 15 * $65.4m = $981m

Equity Value = $981m + $60m net cash - $0 debt = $1,041m

Investor's Share = 25% * $1,041m = $260.25m

MOIC = $260.25m / $50m = 5.21x

IRR = 39.1%

Key investment merits include:

1. Large and growing addressable market in precision agriculture

2. Proven technology with strong customer traction

3. Scalable business model with improving margins

4. Experienced management team with deep industry expertise

Key risks to monitor:

1. Execution risk in scaling operations

2. Potential for increased competition

3. Regulatory changes affecting data privacy in agriculture

4. Climate-related risks impacting the broader agricultural sector

Management Team (include in Business Model section)

• CEO: Sarah Thompson - 20 years in agricultural banking and farm management

• CIO: John Miller - 25 years in farm operations and land improvement

• COO: Michael Davis - Former operations director at a major REIT

• Board includes experienced farmland investors and agriculture industry veterans

Potential Growth Initiatives

Potential growth initiatives that can increase value in the company:

• Proprietary deal sourcing through local networks and partnerships with agricultural cooperatives

• Comprehensive due diligence process including soil analysis, water rights assessment, and local market dynamics

• Active asset management with a focus on implementing sustainable farming practices

• Strong relationships with local operators for reliable tenant selection

• Acquisition of undervalued or underperforming agricultural properties, implementing improvement strategies (such as irrigation systems, soil health programs, and operational efficiencies)

• Leasing farm land to skilled local operators

Risk Analysis

• Market Risk: the value of the fund’s assets may fall or rise significantly depending on external factors, such as price fluctuations on entire market or for a particular type of asset impacting the value of an investment (e.g. fluctuations in commodity prices affecting lease rates and land values)

• Liquidity Risk: it may take a certain amount of time to liquidate a position, which may have a negative impact on the price of the assets (e.g. limited liquidity of farmland assets)

• Regulatory Risk: Changes in agricultural policies, subsidies, or environmental regulations

• Climate Risk: Extreme weather events and long-term climate change impacts

• Concentration Risk: the fund is authorized to invest up to 10% in a single asset, which means that the fund’s performance may be significantly linked to the performance of such asset

• Operational and Administrative Risks: various risks connected to operational activities, IT systems, administrative procedures and legislations as well as risks associated with using third party services

Investment Thesis and Recommendaiton

Warakirri Cropping represents an attractive investment opportunity due to:

• Growing agricultural market

• Diversified portfolio of high-quality farmland across multiple states and crop types

• Experienced management team with deep roots in agriculture and real estate

• Strong track record of improving land productivity and value

• Stable cash flows from a critical and growing economic sector

• Potential for capital appreciation through land improvement and market dynamics

• Inflation hedge characteristics of farmland

Conclusion

Based on Warakirri Cropping’s high-quality product offering, experienced management team, and the attractive characteristics of farmland as an asset class, we recommend proceeding with the proposed investment in Warakirri Cropping. Next steps include finalising due diligence, preparing offering documents, and initiating the fundraising process.

Based on the comprehensive analysis, we recommend proceeding with the $50m investment for a 25% equity stake in Warakirri Cropping. The company's strong growth trajectory, expanding market opportunity, and potential for margin expansion offer an attractive risk-reward profile. The expected returns range from 39.1% to 53.3% IRR, which exceed typical private equity return thresholds.

Appendices

(Note: In a real memo, these would be separate, detailed documents)

• Detailed financial projections and cash flow models

• Market research report on U.S. farmland values and trends

• Case studies of successful property improvements from Fund I

• Draft Limited Partnership Agreement

Investment Theses

• Agriculture

• Natural assets

• Food and sustainability

• Climate technology

• Emission reduction

• Renewable energy

Agriculture Investment Thesis

The agriculture sector presents a compelling investment opportunity driven by the increasing global demand for food, the need for sustainable farming practices, and the potential for technological innovation to revolutionize the industry. As the world population continues to grow, reaching an estimated 9.7 billion by 2050, the demand for agricultural products is expected to increase by 70%. This growth, coupled with challenges such as climate change, water scarcity, and soil degradation, creates a pressing need for more efficient and sustainable agricultural practices.

Our investment strategy in agriculture focuses on companies and technologies that enhance productivity while promoting sustainability. This includes precision agriculture technologies that optimize resource use, biotechnology firms developing drought-resistant and high-yield crops, and companies implementing regenerative farming practices. We also target investments in vertical farming and controlled environment agriculture, which can significantly increase yields while reducing water usage and land requirements. By investing in these areas, we aim to capitalize on the sector's growth while contributing to global food security and environmental sustainability.

Natural Assets Investment Thesis

Natural assets, including forests, wetlands, and biodiversity, represent a unique and increasingly valuable investment opportunity. As the world grapples with climate change and ecosystem degradation, the importance of preserving and restoring natural capital has become paramount. This shift in global priorities is creating new markets and revenue streams associated with natural assets, such as carbon credits, biodiversity offsets, and payments for ecosystem services.

Our investment approach in natural assets focuses on projects and companies that conserve, restore, and sustainably manage ecosystems while generating financial returns. This includes sustainable forestry operations, wetland mitigation banking, and companies developing innovative technologies for ecosystem monitoring and valuation. We also target investments in natural climate solutions, such as reforestation and soil carbon sequestration projects, which offer the dual benefit of climate change mitigation and biodiversity conservation. By investing in natural assets, we aim to generate long-term, stable returns while contributing to global efforts in climate change mitigation and biodiversity preservation.

Food and Sustainability Investment Thesis

The food and sustainability sector offers significant investment potential as consumer preferences shift towards healthier, more sustainable food options and as the global food system faces pressure to reduce its environmental impact. With the food industry accounting for about 26% of global greenhouse gas emissions, there is an urgent need for more sustainable production methods, reduced food waste, and alternative protein sources. This transition presents numerous opportunities for innovative companies to disrupt traditional food systems and capture market share.

Our investment strategy in food and sustainability targets companies that are reimagining the food value chain to be more efficient, sustainable, and health-conscious. This includes investments in plant-based and cultured meat alternatives, which have the potential to significantly reduce the environmental footprint of protein production. We also focus on technologies that extend food shelf life and reduce waste, sustainable packaging solutions, and platforms that shorten supply chains by connecting consumers directly with producers. Additionally, we invest in companies developing functional foods and personalized nutrition solutions, capitalizing on the growing consumer interest in food as a tool for health and wellness. Through these investments, we aim to generate strong returns while promoting a more sustainable and equitable global food system.

Climate Technology Investment Thesis

Climate technology represents one of the most critical and potentially lucrative investment opportunities of our time. As the world races to mitigate the impacts of climate change and transition to a low-carbon economy, the demand for innovative climate solutions is skyrocketing. The International Energy Agency estimates that annual clean energy investment needs to more than triple by 2030 to around $4 trillion to reach net zero emissions by 2050. This massive capital flow creates unprecedented opportunities for technologies that can accelerate the transition to a sustainable, low-carbon future.

Our climate technology investment strategy focuses on scalable solutions across various sectors that can significantly reduce greenhouse gas emissions or enhance climate resilience. Key areas of interest include renewable energy technologies, energy storage solutions, smart grid systems, and energy efficiency technologies for buildings and industry. We also target investments in climate analytics and modeling platforms, which are crucial for understanding and adapting to climate risks. Additionally, we see significant potential in negative emissions technologies, such as direct air capture and enhanced weathering, which will be essential to achieve global climate goals. By investing in these transformative technologies, we aim to generate substantial returns while contributing to the global effort to combat climate change.

Emission Reduction Investment Thesis

Emission reduction has become a central focus for governments, corporations, and investors worldwide as the urgency to address climate change intensifies. With many countries and companies committing to net-zero emissions targets, the market for emission reduction technologies and services is experiencing rapid growth. The carbon offset market alone is projected to reach $200 billion by 2050. This regulatory and market pressure creates significant opportunities for companies that can provide effective solutions for reducing greenhouse gas emissions across various sectors.

Our investment approach in emission reduction targets companies and technologies that offer measurable, verifiable, and scalable emission reduction solutions. This includes investments in industrial process innovations that minimize emissions, such as green hydrogen production and carbon capture and storage technologies. We also focus on companies developing advanced materials and circular economy solutions that reduce embedded carbon in products and supply chains. Additionally, we see significant potential in software and IoT solutions that enable precise measurement, reporting, and verification of emissions, which are crucial for carbon markets and corporate sustainability efforts. By investing in these areas, we aim to capitalize on the growing demand for emission reduction solutions while contributing to global decarbonization efforts.

Renewable Energy Investment Thesis

The Renewable Energy thematic presents a compelling long-term investment opportunity, driven by the urgent global need to transition away from fossil fuels and combat climate change. This sector is poised for sustained growth over the coming decades, supported by declining technology costs, supportive government policies, and increasing corporate and consumer demand for clean energy solutions. Wind and solar power generation are reaching cost parity with or surpassing traditional energy sources in many markets, while emerging technologies like green hydrogen and advanced energy storage solutions are opening new avenues for growth. The renewable energy transition is also catalyzing innovation across adjacent sectors, including electric vehicles, smart grids, and energy-efficient building technologies. With global investment in clean energy projected to reach $1.4 trillion annually by 2030, the renewable energy thematic offers exposure to a fundamental reshaping of the global energy landscape. The renewable energy sector's growth is further bolstered by increasing ESG-focused capital flows and the potential for significant government stimulus aimed at green infrastructure. While the thematic may experience short-term volatility due to policy changes or technological disruptions, the long-term trajectory remains strongly positive as the world moves towards a low-carbon future. As renewable energy becomes increasingly central to global energy systems, investors in this thematic stand to benefit from both the sector's growth and its crucial role in addressing one of the most pressing challenges of our time.

Investing in Renewable Energy is crucial for addressing some of the most pressing challenges of our time while simultaneously capitalizing on significant economic opportunities. Primarily, it plays a vital role in combating climate change by reducing greenhouse gas emissions, which is essential for mitigating the devastating effects of global warming on ecosystems, economies, and human health. Beyond environmental benefits, renewable energy investments drive technological innovation, create jobs, and foster economic growth in emerging industries. They enhance energy security by reducing dependence on finite fossil fuels and volatile foreign energy sources, thereby improving national resilience and geopolitical stability. As renewable technologies become increasingly cost-competitive with traditional energy sources, they offer the potential for long-term energy price stability and reduced energy poverty in developing regions. Moreover, the transition to clean energy addresses public health concerns by reducing air pollution from fossil fuel combustion. From an investment perspective, the renewable sector's rapid growth, supportive government policies, and increasing corporate commitments to sustainability make it an attractive opportunity for both short-term returns and long-term value creation. By investing in renewable energy, individuals and institutions can align their financial goals with positive global impact, contributing to a sustainable future while potentially benefiting from the sector's continued expansion and technological advancements.