D20 | Duxton Water

ASX: D20	NAV $1.54
Change	Net Asset Value per Share as at 30 June 2019

Duxton Water Limited ("Duxton Water" or "the Company") is Australia's only listed vehicle providing investors with a direct exposure to the Australian water market.

Through ownership and active management of a diversified portfolio of water assets, Duxton Water provides irrigators with a broad range of water supply solutions.

Structural shifts in productive demand for water, combined with the cap on supply, suggests water entitlements may experience further appreciation in value.

With the active management approach taken by Duxton Water, the Company expects to provide investors with a bi-annual dividend and exposure to capital growth through the appreciation in value of the underlying water assets.

SQM Research rates Duxton Water 4 stars high investment grade

Timeline of Duxton Water

CURRENT MONTH

June 2019

$1.54/share adjusted NAV
$255.9 million water assets
53% of entitlements are leased

Portfolio

Duxton Water owns and manages a portfolio of water entitlements, providing the irrigation community with a broad range of water supply solutions.

As of 31 March 2019:

Entitlement Portfolio Value by Region

Water Portfolio Diversification

Water Security
Breakdown

The target for Duxton Water, is to have 70-80% of the entitlements in long-term leases with irrigators. This provides Duxton Water, and its shareholders, a visible, regular revenue stream, whilst providing the irrigator access to the resource with the same level of security that they would have if they owned it themselves without the capital cost.
The ‘unleased’ portion of the portfolio allows Duxton Water to receive and then actively manage the annual allocation water. This is traded in the spot market or forward contracted. The ‘unleased’ portion may achieve returns above that of the leased portion, but returns are expected to be more volatile year-to-year, as allocation volumes and prices are more variable and driven by shorter term trends.

The Company has an ability to optimise returns and minimise downside risk through the diversified portfolio and hedging opportunities. For example, some entitlements allow carryover from one year to the next. The Company can also enter into forward contracts, and own general security entitlements. These have a lower capital cost and in wet periods (when allocation prices are lower) will yield well with greater volume of allocation.

Short term

Annual allocation (usable water) prices can be volatile and fluctuate considerably over the course of a single year due to the nature of the farming cycle and short-term weather trends...
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Long term

Water entitlement prices tend to be less volatile than allocation prices, however entitlement prices have continued to steadily increase following Government entitlement buy-backs...
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Annual allocation (usable water) prices can be volatile and fluctuate considerably over the course of a single year due to the nature of the farming cycle and short-term weather trends. Annual allocation prices can be impacted by long-term weather trends (wet-year vs dry-year).

This shift towards higher margin annual crops, and growing inelastic demand from new permanent plantings, has led to an increase in competition for the available resource. Duxton Water believes this structural shift in demand will result in a new ‘average’ allocation price, and renewed interest in longer-term water supply solutions.

Video Highlights

In the past, irrigators received a permit to access water based on their plantings; permanent crops like vines or nut trees needed a higher security of supply than annual growers who could scale their production up or down each year dependent on the available resource. In the 1990s, it was realised that further issue of water permits was not sustainable, so a cap was placed on the further issuance. To allow water-users to continue to develop, grow and change their production, the Government developed a trade capability, by recognising the permit as a perpetual right to the resource, and by separating this asset from the land. So, one can own water without land and land without water.

Today these rights are called water entitlements; these are a perpetual right to a particular volume of water. Each year, the entitlement holder receives an allocation based on their entitlement and its particular characteristics. In some years it may be a full allocation (i.e. they receive 100% of their entitlement) and in other years it may be as low as 0% for some entitlements. Exchange platforms and brokers were introduced to facilitate trade of these two assets; entitlements, and the annual usable volume of water (allocation).

Water entitlement prices tend to be less volatile than allocation prices, however entitlement prices have continued to steadily increase following Government entitlement buy-backs. Given the expectance of a further decline in entitlements on offer due to Government buy backs, a short term shift toward higher margin annual crops and a long term shift towards increased permanent plantings, it is expected that water entitlement prices will continue to rise.

From a demand side, structural shifts have been observed in the market in terms of both annual and permanent plantings. Broadly there is a trend towards higher margin annual crops, like cotton. While annual growers do tend to scale up and down depending on the available resource, these higher margin annual crops enable growers to be more price competitive, and are now disrupting other industries as they compete for the water resource.
The water market is built to be efficient and as such, demand and supply factors largely determine the price for water, which results in the resource moving to its highest and best use.
More recently, there has been a resurgence in the viticulture and citrus industries and significant growth in new nut plantings. These permanent growers have a set trajectory of demand for the water resource as their plantings mature. For example, almonds require only ~2ML/ha when planted, but 14ML/ha at maturity, 7 years later. This means, in 7-10 years there is expected to be a significant increase in the inelastic demand in the market.

In the Southern Murray Darling Basin Region where the core of Duxton Water’s portfolio lies, there are roughly $20 billion worth of entitlements on issue. Following the realisation from government in 2008 that the volume of entitlements on issue was unsustainable, they begun executing on the “Murray Darling Basin Plan” which included investment in infrastructure, on-farm technologies, and a direct a “buy-back” program, where the Commonwealth and State governments recognised the property rights and used the market to buy back water entitlements from willing sellers. These entitlements, now managed by government, receive allocations each year and this usable water is put to environment and conveyance needs.

It is estimated the government now owns 28% of the entitlements on issue in this region. Duxton Water and other institutional investors collectively own around 6% of the remaining 72% on issue (available for consumptive use). The rest of the market is very fragmented, and entitlements remain held mostly by the irrigative community.

Team

The Board is experienced in Australian and global agriculture and has had exposure to Australian water markets for many years.

ED PETER

Chairman of the

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Ed Peter is the co-founder and Chairman of Duxton Asset Management (“Duxton”). Prior to forming Duxton in 2009, Ed was Head of Deutsche Asset Management Asia Pacific (“DeAM Asia”), Middle East and North Africa. Ed has been exposed to the Australian water market since 1999.

ED PETER

Chairman of the

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PETER MICHELL

Independent Non-Executive Director

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Peter Michell is Executive Director at Michell Wool Pty Ltd and was its Managing Director for the decade following 2004. Peter holds a Bachelor of Management UniSA, FAICD, FGLF2000, and currently sits on the University of Adelaide’s Agribusiness Advisory Board.

PETER MICHELL

Independent Non-Executive Director

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STEPHEN DUERDEN

Non-Executive Director

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Stephen Duerden is the CEO of Duxton Asset Management. Stephen has over 26 years of experience in investment management and joined Duxton in May 2009. Prior to this, Stephen was the COO and Director for both the Complex Assets Investments Team and the Singapore operation of DeAM Asia.

STEPHEN DUERDEN

Non-Executive Director

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DIRK WIEDMANN

Independent Non-Executive Director / Deputy Chair

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Dirk Wiedmann has 28 years of experience in the finance industry. Over his career, Dirk has held senior global positions with several Banks, including UBS AG, Bank Julius Baer & Co Ltd and Rothschild Bank AG. Dirk has been investing in Australian agricultural businesses since 1999.

DIRK WIEDMANN

Independent Non-Executive Director / Deputy Chair

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DENNIS MUTTON

Independent Non-Executive Director

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Dennis Mutton has a long history in the fields of natural resource management and primary industries. Dennis has also held roles as Commissioner and Deputy President of the Murray Darling Basin Commission and Chair of the SA Natural Resources Management Council.

DENNIS MUTTON

Independent Non-Executive Director

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KATELYN ADAMS

Company Secretary

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Katelyn Adams has over 10 years of accounting and company secretarial experience, servicing predominantly ASX listed companies. Katelyn has extensive knowledge in company secretarial duties, ASX Listing Rule requirements, IPO and capital raising processes, as well as a strong technical accounting knowledge.

KATELYN ADAMS

Company Secretary

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The Investment Manager is an external manager, Duxton Capital (Australia), and is part of the broader Duxton Group. The Group is a global agri and alternative asset manager with over $1.4 billion under management and advice as at May 2019. Through years of managing a diverse range of commodities and production businesses across the world, the Group has an understanding of the value and significance of the resource of irrigators, and has unique deal-flow opportunities in the water space. With internal water specialists and a dedicated team to manage water assets, the team at Duxton Capital (Australia) is well-equipped to grow and manage this portfolio and provide strategic solutions to Duxton Water’s customers.

Australia’s only ASX listed vehicle providing investors with direct access to water