Executive Summary

The secretive J.G. Boswell Company(OTCPK:BWEL) has appeared to turn over a new leaf–and shareholders are likely to benefit significantly from the company’s change in direction. While historically the company has been tight lipped and seldom entered into public transactions; in the past year the company has publicly been mentioned in a number of transactions that monetize assets that Boswell has held tightly for decades. The first public transaction was the announcement of the Boswell’s Gwydir Valley Auscott subsidiary for a reported $300 million AUD this past fall. Then the company filed several filings with the California Environmental Quality Act website to sell significant amounts of water this year. Then on June 30th it was mentioned that Boswell finalized a sale of its minority interest in its cottonseed company to Corteva. Before investors could even catch their breath from the Corteva news, Boswell went on to announce on July 2nd that the company would be working with PwC to sell the remainder of its Auscott interest for at least $500 million AUD this fall.

The below article will delve into each of these assets sales further, and provide the reader with insight into how the transactions transpired. The article will also aim to discuss what the financial impact of these transactions will be for J.G. Boswell cash flow, and book value on a post tax basis. As the reader will see, these transactions in aggregate could wind up increasing J.G. Boswell’s book value per share from $533 (based on FY2019 financials) to over $780 per share in FY2021 which will be reported in only 14 months from now. With a current share price of $572 (closing price on Friday, August 7th), a rise to $780 per share would represent a 36.4% gain during that period.

Also, please note that while J.G. Boswell has a market cap of approximately $560 million it still trades on the OTC markets and only provides financial statements to shareholders. Due to the company’s long standing practice of only providing financials to shareholders, and not making them publicly available on platforms like OTCMarkets there are a number of brokerages which will no longer allow retail investors to purchase shares. These brokerages will allow existing Boswell shareholders to sell their positions, but not add shares. That being said, as of the writing of this article, Boswell can still be purchased at Fidelity, Schwab, and TD Ameritrade. Please see the risks section of this article for additional information.

Auscott Gwydir Valley Sale

In July, 2019 J.G. Boswell quietly moved forward with its first major asset sale in nearly two decades when it put up its Gwydir Valley Auscott property for sale. Boswell, a secretive company hired PwC to lead the effort. Final bids rolled in by September, and the sale was eventually finalized in the fall to Australian Food and Fibre. Last year, I wrote about the details of that sale in an SA article, which readers can review here.

While a sales price for the Gwydir property has yet to be disclosed by either Boswell or Australian Food and Fibre, the speculated sales price was to be $300 million AUD, or approximately $204 million USD using a $0.68 AUD to USD conversion rate. In the Auscott sale article linked above, the CEO of Auscott Ashley Power was quoted as saying the following:

Mr Power said the deal was “well within our expectations – we’re pleased with the result”

Based on the quote above, I believe that it is fair to assume that Auscott received a sales price near their expectations of $300 million AUD. In my article last August, I indicated that the Gwydir sale would likely add the equivalent of $240 million AUD or $165 million USD to Boswell’s book value, as the holding value of the Gwydir Valley asset was likely around $60 million AUD. Keep in mind that Auscott purchased the Gwydir Valley property around 1979 and built up its associated infrastructure around the same time.

Additionally, it should be noted that Australia does not charge capital gains taxes on assets that were purchased prior to 1985–which was the case for all of the Auscott properties. Readers can review additional information on Australian capital gains taxes here. That being said, when Boswell moves to repatriate the Gwydir Vally sale proceeds to the US, it could be subject to up to a 35% tax on the capital gain from the sale. If we conservatively assume that the entire capital gains profit from the Gwydir Valley sale is subject to the 35% tax, then that would mean that the $165 million USD profit would be a post tax profit of $107.25 million. This would mean that the total post tax value of Gwydir to Boswell shareholders would be $148 million.

As the Gwydir Valley transaction was finalized during Boswell’s 2020 fiscal year, this asset sale should show up in their FY2020 financials which will be published and available to shareholders this coming October.

Remaining Auscott Property Sale

Following the successful sale of the Gwydir Valley property in the Fall of 2019, Ashley Power the CEO of Auscott stated the following in an article that readers can review here:

“We don’t talk much about our strategies, but we have no plans to exit the cotton industry in Australia, and we are looking for opportunities to invest further all the time,”

So it came as a bit of a surprise when on July 2nd, Auscott announced on the media portion of their web-page that they were working with PwC to sell the remainder of the Auscott business off to the highest bidder. The first round of bids are due on Wednesday, August 12th, and according to this article in the Australian Financial Review the sale could be for over $500 million AUD, or approximately $360 million USD. An article in Australia’s Farm Weekly mentioned that Boswell was hoping to “close the deal by about December”, and that according to industry sources the Auscott property was worth “easily more than $500m according to some industry sources.

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In Auscott’s FY 2019 financials, the subsidiary reported to the Australian Securities and Investments Commission “ASIC” (readers can buy a copy of the report from ASIC at the following link), total assets of $392.8 million AUD. If my above assumption about the value of Gwydir Valley being valued at $60 million AUD, then that would mean the remaining asset value for Auscott would be $332.8 million. This would mean that a sale of the remaining properties for $500 million AUD would add approximately $170 million AUD to Boswell’s book value (~$122 million USD using a conversion rate of $0.72 AUD to $1 USD).

Using the same tax logic from the Gwydir Valley section above, this would mean that the post repatriation tax value to Boswell shareholders would be approximately $317.3 million USD, as the capital gains of $122 million would be taxed at 35%. The addition to book value would thus be approximately $79.3 million USD–again I’m conservatively assuming the entire capital gains would be taxed at 35%.

As for the rationale of the sale, a quote from a recent article in the Australian Financial Review, noted the following from J.G. Boswell chairman, James Boswell:

Boswell confirmed the move to sell on Thursday.

“We have stood together with growers, employees and the community over 57 years to build a cotton industry that is truly world class,” Boswell said in a statement to Street Talk.

“Now is the right time for the J G Boswell Company to focus our efforts on opportunities in our core operations in California.”

Mr. Boswell unfortunately did not expand upon what J.G. Boswell’s core operations in California were, but presumably that means their cotton, tomato, and eventual pistachio business in California’s central valley.

Phytogen Sale

Another non-core business that Boswell historically participated in was its minority interest in Phytogen. On June 30th–predating the Auscott announcement by a few days–it was announced that Corteva (CTVA) would be acquiring all of J.G. Boswell’s 46.5% minority interest in their cottonseed JV partnership called Phytogen. This sale came as a surprise to many, including myself, as the Phytogen JV was over 20 years old. Phytogen started off as a partnership between J.G. Boswell and Dow Chemical (DOW) in 1998. In 2019 Dow spun off their agricultural business including Phytogen, and created Corteva. Some, including myself, had thought that Boswell’s Phytogen stake may be worth a great deal of money if it was ever monetized.

Corteva’s most recent 10-Q filing for the period ending June, 30th 2020 shed light on the mystery of the value of the Phytogen sale. Corteva indicated that the sales price for Boswell’s Phytogen stake was “only” $60 million. On page 31 of the 10-Q, Corteva says the following about the Phytogen sale:

Noncontrolling Interest In June 2020, the company completed the acquisition of the remaining 46.5 percent interest in the Phytogen Seed Company, LLC joint venture from J. G. Boswell Company. As the purchase of the remaining interest did not result in a change of control, the difference between the carrying value of the noncontrolling interest and the consideration paid, net of taxes was recorded within equity.

On page 6 of the 10-Q Corteva lists the following financing activities, the reader can see clearly that Corteva list $60 million for the non-controlling interest purchase (see image below).

Page 6 of Corteva’s 2020 Q2 10-Q filing

On page 7 of the 10-Q, Corteva lists that the consideration paid for the non controlling interest was $52 million, which means that the carrying value for the 46.5% interest was likely around $8 million at the time of the sale ($52+$8 = $60).

Page 7 of Corteva’s 2020 Q2 10-Q filing

If the consideration paid was in fact $52 million, then that amount would be treated as capital gains, and would be subject to a 21% tax rate. After accounting for taxes Boswell’s Corteva stake would go down from $60 million to $49.08 million.

While less than expected, there are a few silver linings to take away from the sale. The first being that the book value of Boswell’s Phytogen stake in their 2019 financials was $10.459 million. That means that a $60 million cash sale, netting $49 million after taxes, should increase book value by approximately $40 million. Second, since Corteva included the sale as a part of their Q2 10-Q filing, it should mean that the sale was finalized before Boswell’s FY 2020 year end and will thus show up in their FY 2020 annual report to be published in October.

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FY 2020 Water Sales

In a November, 2019 SA article I wrote, which readers can view here, I detailed out why California’s State Groundwater Management Act “SGMA” would be beneficial to those who own surface water rights in California. Towards the end of that article, I mentioned that Boswell had recently entered into two separate agreements to sell “up to” 100,000 acre-feet “AF” to various growers in the Central Valley. One of these agreements was between Boswell and growers within Westlands Water District, San Luis Water District, and the Pleasant Valley Water District, which had a termination date of July 13th, 2020 (see image below, source under image).

Source: 65,000 Acre-Feet Sale to Water Districts from Boswell

The second agreement for 35,000 AF was between Boswell and the Kern County Water Authority. This agreement had a termination date of December, 31st, 2019. Readers can view an image and the source document below.

Source: 35,000 Acre-Foot Sale to KCWA

It is important to note here that what Boswell is trying to accomplish in the above CEQA filings is a form of water arbitrage. Boswell, has abundant water resources from various sources like surface water rights, groundwater, and delivered water allocations like state table A water from the State Water Project “SWP”. In the above filings Boswell is indicating that they will use their pre-1914 Kings River water allocation to grow their own crops in their Tulare Lake Basin Water District properties. Boswell also has the right to nearly 100,000 acre-feet of SWP table A water as well for that same district (see image below). Instead of using their table A water, Boswell has decided to transfer for sale the table A water to other growers. There is a catch though. Only in very wet years will a grower receive 100% of their maximum allocation of SWP table A water. If it is a dry year, then only a percentage of the maximum request will be doled out to the various water districts. Below is a list of the maximum SWP allocations that a water district can receive during a given year.

Source: Table A Water Maximum Deliveries by Water District

The 35,000 AF contract was using 2019 SWP table A water, and it is very likely that 100% of that contract was filled since SWP contractors received a 75% allocation in 2019. However, the 65,000 AF contract will fall mostly fall under the 2020 SWP water year. Unfortunately, since this year has been very dry, and is currently at only 62% of average precipitation for the region (see image and source below), SWP table A water allocations have been set well below their maximum rates.

Source: San Joaquin Precipitation Rates

In fact, this past May, the SWP indicated that contractors would only be allowed 20% of their water allotment for the current year, which meant that Boswell’s Tulare Lake Basin Water District would only receive 17,494 AF of their total table A water request this year (source and image below). This means that Boswell likely only sold approximately 17,500 AF of SWP Table A water under the 65,000 AF contract.

Source: SWP water allotments for 2020, set in May, 2020

Regarding margins on these water sales; if we take a look at the annual SWP bulletin B, we will see that Boswell was likely paying around $44.45 per AF for the table A water, and then potentially selling it for a good deal higher than that.

Source: SWP Bulletin B, See page 164 of 172 in PDF

If we look at the Nasdaq Veles California Water Index (NQH2O) readers can see that the average price for water sales between November and December was around $250 when the 35,000 AF contract was likely filled. Conversely the average AF contract price in May and June averaged around $600, with a peak price of $704 in mid June.

Source: NQH20 Index One Year Chart

Putting it all together readers can see that Boswell may have generated a profit of around $16.9 million from the FY2020 water sales before taxes (see chart below created by author). If taxed at 21%, then the potential profit would be around $13.4 million.

Source: Chart created by author

FY 2021 Water Sales

On May 28th, it was announced on CEQA that the Henry Miller Water District would be transferring up to 8,875 AF of water to the Berrenda Mesa Water District. This transfer would take SWP table A water from Henry Miller and redirect it to Berrenda Mesa. Additionally, a separate CEQA announcement on May 28th indicated that Henry Miller would be transferring an additional 2,200 AF to Berrenda Mesa in 2020. The second transfer however, would be redirecting Henry Miller’s Kern River supply to Berrenda Mesa.

The Henry Miller Water District just so happens to fall 100% on J.G. Boswell lands, and Boswell manages the water district. In a recent CEQA filing, the Henry Miller Water District is described as having access to an SWP allotment of 35,500 AF per year, along with 5,000 AF of Kern River supply and approximately 30,000 AF per year of groundwater.

Source: Kern Fan Authority Integration Project, see page 25 of 80

Source: Chart created by author

Also of note is the fact that J.G. Boswell does not own any land in the Berrenda Mesa Water District, but Wonderful Orchards has two of the five directors sitting on the BMWD board of directors. This is significant, because it means that Boswell is likely selling water to Linda and Stewart Resnick’s Wonderful Company which is the world’s largest fully integrated producer of almonds, pistachios, and is also a major player in mandarin oranges and wine. For those interested in learning more about the Wonderful Company, I highly recommend reading A Kingdom From Dust, which is an in depth article written by Mark Arax (Mr. Arax Co-Authored the King of California: J.G. Boswell and the Making of a Secret American Empire).

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As to the value of these water sales, this is obviously highly dependent upon when the sales occur. That being said, if we assume the sales were spread between July and August, then based on the NQH20 index Boswell likely received around $600 per AF with a cost per AF of approximately $45. This would result in a post tax profit of around $4.1 million (see chart below created by author).

Source: Chart created by author

Putting It All Together

Combining all of the above, the reader can see in the chart below that Boswell’s post tax cash could be boosted by over $530 million in the next two fiscal years, and book value could potentially increase by nearly $243 million. With a current book value per share of around $534, this would mean that per share book value could increase to $696 in FY2020, and up to $780 per share by FY2021. With a current share price of $572 (market closing price on Friday, August 7th), a gain of $208 per share would represent a 36.4% increase from the current market valuation.

Additional Near Term Catalysts

In addition to the significant catalysts listed above, J.G. Boswell also has at least one other asset, which would not be considered a part of its core California business. Boswell’s Yokohl Valley Ranch is a 36,000 acre plot of land that was formerly used for Boswell’s cattle business. For the 12 years between 2006 and 2018 Boswell attempted to advance a plan to create a master planned community on the property, but decided to eventually walk away taking a loss on the development costs. Today the property doesn’t appear to be utilized by the company, and is likely ripe for a sale to another party. If Boswell is truly monetizing all of its non-core interests, the Yokohl Valley property is likely next on the list. For those interested in learning more about Yokohl Valley, please see this website.

Risks

Just like any investment, there are risks associated with purchasing shares of J.G. Boswell. It should be noted that the company trades on the OTC market, and only reports its financials once a year. Even then shareholders must provide a PDF copy of their brokerage to Boswell investor relations in order to obtain a physical copy of that year’s financials. Due to the recent proposed SEC rule S7-14-19 a number of brokerages will no longer allow retail investors to purchase the stock, only sell it. This has created an even more illiquid market for the stock and investors should make absolutely sure to use limit orders to buy the stock.

While some brokerages no longer allow investors to purchase Boswell, Fidelity, Schwab, and TD Ameritrade (among others) will allow investors to purchase shares. Also, please note that the average volume over the last year was 438 shares per day with an average sales price of $578, meaning that around $253,000 a day are traded in Boswell.

The above being said, it should be noted that both the Auscott Gwydir Valley sale as well as the Phytogen sale have already been finalized, and the FY2020 water sales are likely locked in as well. For this reason I see an asymmetric risk reward scenario, where there is a lot of potential upside and minimal downside risk due to the margin of safety (i.e., cash from recent deals, large asset base, etc.).

Conclusion

Boswell’s recent spree of monetizing non-core assets should significantly benefit shareholders in the near term. Their Gwydir Valley and Phytogen sales–along with recent water sales–should show an immediate positive impact on the company’s FY2020 balance sheet to be reported this October. Further assets sales of the entire Auscott property will provide additional cash flow and positive adjustments to the company’s book value in FY2021–to be reported in October, 2021. For these reasons, I believe that the company’s stock could very well appreciate over 36% in the next year as the market comes to realize what these asset sales mean to Boswell’s balance sheet.

Thank you for reading and please feel free to leave comments and questions for me 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 own shares in J.G. Boswell, but have no position in any other company mentioned in this article.

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.



Via SeekingAlpha.com