Putin's special military operation turns spotlight on a tiny Catalist-listed agricultural company

DON Agro International could be on the brink of delivering exciting returns to its shareholders; or losing a great deal of its value. Much depends on what happens in Russia in the weeks and months ahead.

On the one hand, the Catalist-listed company that cultivates agricultural crops and produces raw milk appears to be positioned to benefit from rising food commodity prices as well as the increasing value of arable land.

On the other hand, the global opprobrium and economic sanctions that Russia has brought on itself by invading Ukraine create a great deal of uncertainty for Don Agro's shareholders - which is unlikely to be completely dispelled by even the most detailed of disclosures by the company.

Yet, as the old adage goes, there is no such thing as bad publicity. If Don Agro manages to thrive as it seems to be expecting despite the geopolitical turmoil sparked by the war in Ukraine, the scrutiny it is currently attracting might eventually translate to a wider investor following.

On Mar 1, just over a week after Vladimir Putin began his "special military operation" in Ukraine, Don Agro reported its financial results for FY2021 ended Dec 31 and put out an accompanying statement declaring that it has not been affected by "the current geopolitical situation".

Don Agro said its crops and milk are sold directly to traders in Russia, and that all the raw materials it needs continue to be available.

It added that a major part of its finished goods inventory as at Dec 31 has since been sold to grain traders and exporters. While the company receives Russian roubles in these transactions, prices are determined by international commodities exchanges.

Don Agro also said it has not been affected by soaring interest rates in Russia since the invasion began, because interest rates on its existing borrowings are fixed.

The company went on to say that it held cash and cash equivalents totalling S$7.3 million as at Mar 1, which is more than sufficient to redeem all its borrowings of S$3.5 million and continue its operations.

Most crucially, Don Agro said none of its units or officials are on the sanctions lists of the United States, the European Union or the United Nations. While the company does have dealings with companies on the US and EU sanctions lists - including Gazprom, Rosneft, Sberbank and Lukoil - these transactions are not prohibited and in line with its "sanctions compliance policy".

SGX queries

While Don Agro ought to be commended for making these disclosures, it should arguably have gone much further.

Don Agro should have realised that investors are not just doubting its ability to cope with the turmoil sparked by Russia's invasion of Ukraine. Many investors are also likely to be worried that companies to which Don Agro is exposed might suddenly come to grief.

On Mar 2, almost immediately after Don Agro put out its statement, Singapore Exchange (SGX) asked for more information - including the nature and extent of Don Agro's dealings with sanctioned Russian companies.

On Mar 4, in response to SGX's queries, Don Agro said Rosneft and Lukoil supply it with fuel for its agricultural and transport machinery. Gazprom supplies it with gas for heating purposes, and services its gas equipment.

Gazprom apparently also leases land from Don Agro in order to conduct repair works for a local gas pipeline.

As for its relationship with Russian banks, Don Agro said Sberbank is the only financial institution providing it with loans while 70.7 per cent of its cash and cash equivalents as at Dec 31 were held with Rosselkhozbank.

Don Agro included a table with its response to SGX that showed its dealings with all of these Russian companies in FY2021 - down to transactions worth as little as 77,000 roubles (about S$1,000).

Blessing in disguise?

Even with all the additional information Don Agro has provided, the dynamic situation in Russia is likely to keep many investors in Singapore on the sidelines.

Yet, the scrutiny the company is attracting because of the turmoil might turn out to be a blessing in disguise.

Listed on Catalist only in February 2020 following a placement of 23 million shares at S$0.22 each, Don Agro has not really drawn much interest from investors.

Its headline financial numbers for FY2021 probably did little to change this.

Revenue slipped 0.3 per cent to S$30.9 million. Net profit increased 18.4 per cent to S$10.3 million - but this was due largely to the impact of the purchase of a subsidiary at less than book value during FY2021, and the absence of listing expenses chalked up in FY2020.

Moreover, Don Agro's board did not recommend a final dividend for FY2021 in order to conserve liquidity. The company paid an interim dividend for FY2021 of nearly S$0.00852 per share. For FY2020, the company paid a dividend of S$0.01157 per share.

The company's commentary on its financial numbers casts a more positive light on its performance though.

Don Agro said revenue was flat largely because a "significant portion of harvested crops" was not sold in FY2021, in expectation of higher prices in FY2022.

The company said higher grain prices and milk prices will have "a significant impact" on its profit margins in FY2022.

Don Agro also benefited from a steep revaluation of its land - from a historical carrying value of S$5.8 million to S$26.8 million. The company's net asset value (NAV) stood at nearly S$0.45 per share as at end-2021, up from nearly S$0.29 per share as at end-2020.

Since Russian tanks began rolling into Ukraine last month, shares in Don Agro have tumbled nearly 22 per cent. The stock closed Friday (Mar 11) at S$0.305.

Don Agro currently has a market capitalisation of just S$45.8 million - which is less than 4.5 times its reported earnings for FY2021.

If the company survives the current turmoil and manages to deliver higher earnings in FY2022 and beyond, its stock could be primed for a rally when the gunfire stops.

READ MORE: Don Agro's external counsel confirms no violation of Russian sanctions