“As long as the whale never surfaces, it is never harpooned.”
The above quote comes from the book “The King of California: J.G. Boswell and the Making of a Secret American Empire” written by Max Arax and Rick Wartzman in 2003. In the book the quote is provided by several Boswell family members in order to convey the level of stealth that the company likes to use while conducting its various businesses. The prime example of this is the fact that J.G. Boswell (OTCPK:BWEL) doesn’t publish its annual reports, investors have to prove that they’re a shareholder by e-mailing a redacted brokerage statement to the company. Only then will Boswell provide a copy of the company’s financial statement. However, even then, the company asks that those reports not be publicly disseminated–a warning I will heed in this article! That being said, the ultra secretive company appears to be offering a rare glimpse into the true value of one of its core assets, Auscott.
This article will explain why the Auscott unit sale provides an excellent trading opportunity for investors in the next several weeks–specifically, first round bids for the Auscott property are due on Wednesday, September 4th. I will also aim to provide some additional insights to readers on the valuation of Boswell’s other core assets: a 46% stake in a Dow Dupont cotton seed JV called Phytogen, and Boswell’s core farming operations in California–which contain approximately 150,000 acres of farmland in the San Joaquin Valley along with 400,000 acre-feet of water. It is my hope that readers come away with a glimpse of what a fair valuation of J.G. Boswell may be, and why the Auscott sale is important to investors in the firm.
Timing and Opportunity
As of the writing of this article J.G. Boswell has a market cap of approximately $650 million, with a book value of approximately $617 per share. Boswell has long been noted as an enormous value play by many value investors over the years–for instance see this article by Rick Rule. The problem has always been the fact that there was never a catalyst for the company to monetize its many assets. To the author’s knowledge, the company has not in the last 10-20 years sold any of its core assets–thus many of these hidden assets never had their true value realized. However, that seems to have changed very recently. In the last week of July, Boswell’s wholly owned subsidiary Auscott issued the following press release that solicits bids for a portion of Auscott’s property and cotton ginning business located in the Gwydir Valley of Southern Australia called Midkin Aggregation. The press release requested that any interested parties provide their initial offers by September 4th, 2019. According to a number of articles, like this one, initial offers are expected to come in at $300 million AUD, or using the AUD/USD conversion rate on 8/9/19 this would be equivalent to $204.2 million USD.
With a market cap of approximately $650 million USD, a potential sale of approximately $204 million USD would be a rather significant asset sale for Boswell. What makes it so remarkable is the fact that Gwydir Valley is only one of four separate cotton properties under the Auscott umbrella (see below map in the Auscott section of the article), which itself is only a small part of Boswell’s total asset base.
Based on my research for this article, it is my belief that the Gwydir Valley property is likely contained on Auscott’s, and by extension Boswell’s, books for approximately $60 million AUD (~$41 million USD). The rationale for this assumption mainly comes from the fact that Auscott purchased the Gwydir Valley property in 1979, and built up the associated infrastructure (i.e., cotton gin and ancillary facilities) around the same time. According to this research paper Australian cotton land in the Namoi Valley was priced at $100 to $125 per hectare in the 1960’s. Even if you double the high end of that figure to $250 per hectare, the Gwydir valley land purchase of 17,307 hectares (only 12,367 arable hectares) would be approximately $4.327 million AUD. In 2015 Auscott completed a $40 million AUD cotton gin in the Murrumbidgee Valley that can process 250,000 cotton bales a year. By comparison the cotton gin in the Gwydir Valley can only process approximately 200,000 bales per year. If we assume the Gwydir cotton gin–which was built decades before the Murrumbidgee cotton gin–is on Auscott’s books for $20 million AUD, then that would bring the land and cotton gin book value for Gwydir up to $24 million AUD. There are likely ancillary facilities and upgrades made over the years, but the reader can see how Boswell will likely reap a substantial gain on the sale of the Gwydir property.
If the above assumption is correct then that would mean that the book value of Boswell could go up by around $240 million AUD (~$163 million USD) assuming the sale goes through at the suggested price of $300 million AUD. This transaction alone would add approximately $165.00 per share to the company’s per share book value of $617, bringing the potential book value to about $782 per share. Furthermore, this possible transaction highlights the enormous unsurfaced book value that could be created should Boswell choose to sell additional assets in the future.
For readers looking for a “quick” trade, I would suggest purchasing Boswell at its current price, and holding through at least the September 4th, 2019 Auscott offer deadline date. Other near term catalysts for Boswell include the upcoming dividend–ex. dividend date is historically August 30th, with a payable date around September 10th. The company will also issue their 2019 earnings for the period ending June, 30th 2019 around the middle of October.
For readers who want additional information on Boswell’s core assets, I encourage you to read on below. Due to the lack of disclosure the company has, I will attempt to give readers some insight into Boswell’s core assets and why they are underappreciated by the market. I also encourage readers to download the following Excel file which contains some additional information about J.G. Boswell’s assets.
Description of Boswell’s Auscott Asset
J.G. Boswell traces its roots in California agriculture back to the 1920’s, but didn’t make their way into Australia until 1963 when they made their initial investment in the Namoi Valley. Boswell’s second investment in Australia came in 1967 when they bought a tract of land in the Macquarie Valley. In 1979 Boswell bought their third investment in Australia with the Gwydir Valley purchase. After a torrid M&A pace in their first 16 years in Australia, the company then went another 36 years until they made their fourth investment with the construction of the Murrumbidgee Cotton Gin that became operational in 2015.
According to this blurb from IBIS (a more detailed report can be purchased from IBIS at the following link) Auscott Limited had total revenues of $272.06 million AUD in 2018 (see quote that follows). Previous year financial sales data can be obtained by going to the Australian Corporate Tax Transparency Data website, which publishes annual income data for Australia’s largest firms.
In 2018 the company generated total revenue of $272,061,000 including sales and other revenue. In 2018 Auscott Limited had 346 employees in Australia including employees from all subsidiaries under the company’s control.
Not to put too fine a point on it, but Gwydir is only a small part of Auscott, and Auscott itself is only a small part of Boswell’s total assets. The next section will briefly discuss some of the values associated with these assets.
Auscott properties map, map produced by author using Excel PowerView and Auscott company data.
Below readers can see a table created by the author looking at the four major Australian components of Auscott. If readers have additional questions on these assets I’m happy to answer them in the comments section of the article. I also recommend reviewing the Excel file provided for the article.
Notes on Auscott Locations, locations and addresses from company website, other data from various sources. Table created by the author.
If one were to value Auscott with a price-to-sales or enterprise value to sales metric relative to its peers–which appears to be approximately 4.5 based on the analysis presented in the below chart–then the value of Auscott would be approximately $1.241 billion AUD or $850.182 million USD using a conversion rate of $1 USD equals $0.685 AUD.
BWEL Price and Enterprise Value to sales relative to Peer Group, Created by Author.
J.G. Boswell’s Phytogen Asset
From a historical perspective the first mention of J.G. Boswell’s cotton seed JV with Dow Chemicals (DOW) called Phytogen pops up in Dow Chemical’s 10-K for the year ended 12/31/1998, the JV is described as such:
The business’ plant genetics and biotechnology platform is focused on three segments: seeds, traits and value-added grains. During the year, the biotech strategy was significantly advanced through strategic acquisitions, joint ventures, research agreements, alliances and the buildup of internal capabilities. The outstanding shares of Mycogen were purchased, providing significant benefits in advancing our intellectual property, germplasm and research capabilities. Through Mycogen, four seed companies in Brazil and one in Argentina were acquired, and a joint venture was formed with J. G. Boswell Company to develop and market cotton seeds globally.
Later in the report, Dow lists the Phytogen JV with Boswell as 51% owned by Dow.
Dow 1998 10-K, Exhibit 21 (see link above).
In the 2004 10-K the JV has increased to 54% owned by Dow and 46% owned by Boswell. To the author’s knowledge, Boswell still maintains a 46% interest in Phytogen to this day.
Dow 2004 10-K Exhibit 21 (see link above).
In early 2019 Dow Dupont spun off their agricultural business into a JV called Corteva (CTVA). According to Corteva’s registration of securities form 10 filing on 5/6/19, Corteva’s cotton business accounted for 2% of Corteva’s $7.8 Billion of net sales in 2018. That 2% would equate to approximately $156 million in sales, and $22 million in profit–Boswell’s 46% interest would equate to $71.76 million in sales and $10.12 million in profits.
Image from Corteva form 10 filing 5/6/19
Using a similar 4.562 Enterprise Value to sales multiple on the Phytogen business (see above section), one would get an asset value for Phytogen of approximately $711 million. Boswell’s 46% stake would thus equate to $327 million.
Boswell’s Core Business, California Agriculture
In addition to the above, J.G. Boswell’s core business is California agriculture. The company is one of the largest land holders in the state with reported land holdings over 150,000 acres of arable land with ample water rights to go along with that land. The 2003 book, The King of California: J. G. Boswell and the Making of a Secret American Empire describes the building of the Boswell empire in great detail, and provides a rich narrative of the company for anyone who takes a position on the stock–particularly the California agriculture business. Readers can find a three minute NPR review of the book at the following link.
Book cover for “The King of California: J.G. Boswell and the Making of a Secret American Empire”
One of the most succinct descriptions I’ve read of the Boswell California operations came from an industry insider on an agricultural message board in 2007. The insider described the Boswell California farming business as such:
The operation is quite fascinating…farming 120,000 ac of row crop. They have two ranch locations – Corcoran, CA at 100,000 ac & Buena Vista (around Bakersfield) at 22,000 ac. In general, they plant 82,000 ac. of pima cotton, 15,000 acres of tomatoes, 5,000 ac of seed alfalfa, 5,000 ac. of hay alfalfa and remaining acres of various crops. In addition, J. G. Boswell has cattle ranch in the foothills of the Sierra Nevadas totaling aroung 59,000 acres. They have around 40 6-row cotton pickers, 4 cotton gins, an oil mill, and in the process of constructing tomato paste plant.
According to Boswell’s own Boswell Tomatoes website, they did complete the tomato paste plant described above, and are now producing “the freshest, most carefully selected tomatoes in the industry”, and produce “the industry’s highest-quality tomato paste”. Boswell is also the only tomato company in the US that controls tomatoes from seed, to field, to manufacturing plant. This industry blog indicated that Boswell has the ability to produce up to 2,778 tonnes per day of tomato paste during the tomato growing season (see Excel file for additional information on Boswell Tomatoes).
Image from “Tomato News” Dec. 2018 blog post (link in section above).
Even forgetting the valuable California agriculture operations (i.e., buildings and associated processing plants and cotton gins), if you value Boswell’s land and associated water rights at just $10,000 per acre you’d get a valuation of $1.5 Billion. Investors can get a sense of the value of San Joaquin Valley farm land at the following website. Many of the farms for sale on that website are pricing themselves at close to $20,000 to $30,000 per acre. All things being equal, the value of the land tends to skew higher for well irrigated land that has historically been productive farmland. Things that Boswell has in spades.
Also of note is the fact that Boswell has the rights to approximately 400,000 acre-feet of water to go along with the 150,000 acres of land. This was noted in the King of California, and also in an April, 11 2000 article in the Wall Street Journal (quoted below):
The arrangement with Boswell gives Azurix a partner with access to 400,000 acre feet of water each year. (An acre foot is 325,000 gallons, or enough water to meet the needs of two urban families for a year.) It also gives it a marquee partner since Boswell, by some calculations, is the biggest farmer in America with more than 150,000 acres under cultivation, most of it growing premium Pima cotton in California’s 240-mile-long San Joaquin Valley. […] Mr. Boswell says it’s clear that, at times, a farmer could make more money selling a water option than growing a crop. “I want an alternative to cotton at 50 cents a pound when it costs 80 cents a pound to grow it,“
With cotton trading at about $0.59 per pound as of Tuesday, August 6th, 2019 one has to wonder if Boswell is possibly interested in selling more water than Cotton in California this year. A look at some recent nearby water sales will illustrate why this is such a lucrative idea.
A water right is the legal right to divert water and put it to beneficial use. Water rights are real property rights which can be bought and sold and are commonly measured in acre-feet (“AF”), which is a measure of the volume of water required to cover an area of one acre to a depth of one foot and is equal to 325,850 gallons. The value of a water right depends on a number of factors, which may include location, the seniority of the right, whether or not the right is transferable, or if the water can be moved from one location to another.
In PICO’s 2019 Q1 investor presentation they indicated that they had three recent water sales in 2018 and 2019 resulting in average pricing of twenty to thirty thousand dollars per acre-foot.
Per acre-feet pricing for PICO’s recent sales, table created by author
Unlike PICO which has sold water rights in recent years, Tejon Ranch Company (TRC) sells water rights on an annual basis. Tejon is a diversified agribusiness with large land holdings, mineral rights, and water rights in Labec California–about 100 miles to the South of the Boswell property. In Tejon’s most recent 10-K for the year ending 12/31/2018, Tejon indicated that they sold the rights to 9,442 acre-feet of water for $968 per acre-foot (one year contract).
Putting it all together, readers can see that the water assets contained by Boswell are truly very significant, and likely extremely undervalued by the market.
J.G. Boswell Hypothetical Value of Water Rights: Created by Author.
Master-Planned Communities: Yokohl Valley and the Yokohl Valley Ranch Cattle Company
As noted above, J.G. Boswell has for some time been one of the largest land holders in the Western United States. Starting in the 1970’s Boswell worked with famous property developer Del Webb to build an active retirement community called Sun City in Arizona. The Sun City venture became the first of several forays into developing master-planned communities. Following Sun City, the company purchased and then developed a 963 acre advanced technology business park in Denver called Interlocken. By the late 1990’s the company finished the development of Interlocken and finally sold the last portion of the property in 2000. Boswell’s next master-planned venture was a 3,063 acre community outside of San Diego called East Lake which was phased into development over a 20 year period from the mid 1980’s through the mid 2000’s.
In 2005 Boswell unveiled their plans to create a master-planned community in the foothills of the Sierra Nevada’s called Yokohl Valley. The planned community would create up to 10,000 homes (the same number of homes were built in EastLake), a 550,000 square foot commercial center, a resort, and a recreation center. The entire community would sit on Boswell’s wholly owned 36,000 acre Boston Ranch, which currently is used by Boswell’s Yokohl Valley Cattle Company.
In the following 13 years since the initial Yokohl Valley announcement Boswell spent many millions researching the development. However, in 2015 the development was put on hold indefinitely. While J.G. Boswell has withdrawn their plans to move forward with Yokohl Valley, it is quite possible for them to move forward with the project–or an entirely different master-planned community.
A Note About Property Values
One reason why Boswell’s asset base is so understated is due to the fact that land and water rights are kept on the books at the price they are purchased at. In the case of J.G. Boswell, much of the company’s land and associated water rights were purchased many decades ago. A 1960 court case between J.G. Boswell vs. the IRS helps illustrate why this is such a big deal. In the court documents there is a table that lists several of J.G. Boswell’s farms at the time of the filing, and the cost of the acreage for each farm.
Several J.G. Boswell farms, and their associated acreage and acquisition cost per a 1960 court case between Boswell & the IRS
Table created by the author using data from the 1960 Boswell vs. IRS filing.
As the reader can see from the above tables, Boswell’s purchase price for nearly 20,000 acres of land was approximately $95 an acre for an aggregate price of $1.825 million. If Boswell were to sell the land and associated water rights today at a price of twenty to thirty thousand per acre, then that land would be valued between $385 – $578 million.
Notes of Caution
As mentioned previously, J.G. Boswell is an ultra secretive firm. Shareholders can obtain financial data, but in order to do so you will need to e-mail Boswell’s investor relations and prove to them that you are a shareholder by providing a redacted copy of your brokerage statement. In your e-mail to them you can note that you would like multiple years of financial statements, however you will need to prove that you were a shareholder during the years requested. The company will then mail you back a physical copy of the financials.
Additionally, please note that J.G. Boswell is an illiquid stock. The average trading volume over the last year is approximately 209 shares per day (8/3/18-8/2/19) with an average closing price of $631.14, meaning that the average transaction volume is around $131,703 per day.
J.G. Boswell’s asset sale of its Gwydir Valley property provides a rare glimpse into the true value of one of Boswell’s core assets. Due to the fact that Boswell purchased and built up Gwydir Valley nearly 40 years ago, Gwydir Valley is likely contained on its books for less than $60 million AUD. A sale of the property at the asking price of $300 million AUD could lead to a per share book value gain of $165, bringing the company’s book value to $782 per share. The company’s stated offer date of Wednesday, September 4th should provide a catalyst for the stock in the near term. This article also aimed to illustrate to readers why Boswell’s current book value is extremely understated. Thank you for reading, please feel free to post your comments and questions below.
Disclosure: I am/we are long BWEL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long J.G. Boswell.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.