Each week I pick an ASX share that I think could be a good idea for both the short-term and the long-term. This week I'm going for Vitalharvest Freehold Trust (ASX: VTH) at today's share price.
Some of my previous picks have been shares like Brickworks Limited (ASX: BKW), A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB).
Overview of Vitalharvest
Vitalharvest is an agricultural real estate investment trust (REIT). The REIT says that its objective is to provide investors with exposure to real agricultural property assets whose earnings profile and underlying value are exposed to the growing global agricultural demand for nutritious, healthy food. The current assets comprise one of the largest aggregations of berry and citrus farms in Australia and are leased to Costa Group Holdings Ltd (ASX: CGC) – Australia's leading horticulture company and largest fresh produce supplier. These assets provide agricultural diversification by way of crop type, climatic region, water source and product end markets.
The ASX share earns rent in two main ways. It earns a fixed rental return. It also receives variable rent from Costa in the form of a share of the profit generated from the farms. That variable rent has been disappointing in recent times due to issues such as the drought, fruit flies near a citrus farm and crumbly berries. The drop in variable rent has been a major cause of the Vitalharvest share price falling to $0.79 today.
A new manager
A month ago it was announced that asset manager Primewest Group Ltd (ASX: PWG) had acquired the manager of Vitalharvest so that it would take over management. Primewest has also acquired an 11.8% stake in Vitalharvest and a right of first refusal over a further 6.2% interest.
Primewest currently manages over $4 billion of assets spanning multiple asset classes.
The REIT ASX share is going to expand its investment targets from more than just farms. It's also going to look for other assets that are critical to the agricultural supply chain like processing and manufacturing facilities for food, food and beverage packaging facilities and storage facilities related to food.
It will be targeting high quality locations throughout Australia and New Zealand with long-term leases to tenants on attractive terms.
Why Vitalharvest is my pick this week
There are several reasons why I think Vitalharvest is a buy at this share price. The first is that it's trading cheaply compared to its assets. At 31 December 2019 it had a net asset value (NAV) of $0.95 per unit. If we assume the NAV hasn't changed since then, the Vitalharvest share price is trading at a 17% discount.
I think Costa's reported results will improve over the next 12 months, which should hopefully increase Vitalharvests' earnings and distributions.
The market may warm up to the Primewest strategy once investors get a look at some of the assets that are potentially going to be acquired.
COVID-19 is still a factor for the share market and the economy. I think it will be ASX shares like agricultural businesses that are able to deliver growth over the next six to twelve months regardless of what direction the economy goes. I think the end of the worst part of the drought will have a positive impact for farming shares as well.
Finally, a good reason to think about Vitalharvest is that it pays out most of its earnings as an annual distribution. At the current Vitalharvest share price it's trading with a trailing distribution yield of 6%.
Foolish takeaway
Vitalharvest is unlikely to deliver incredible returns – REITs aren't tech shares – but I think there's potential for solid share price growth over the next 12 months, plus a yield higher than what the market offers.
