Public market valuation is pure water hype.
Discounted cash flow valuation is less than $8 per share.
Apollo convertible notes priced at $6.75, "smart money"
Stock currently trading at over $11.00 per share.
Finally SB 120 passes and Cadiz Water Project has line of sight to construction! But wait the stock price didn't rebound after the passage? Why not? What's going on here? Who is manipulating the stock? And what's the project fundamentally worth?
The Cadiz Water Project could now be, hypothetically, built in approximately 18-months costing ~$200-275M and financed by Apollo. When the project is built CDZI will finally be able to sell 50,000 acre feet of water per year at a price of $639-$1089 per acre foot and plans to realize net operating income of $500-$600 per acre foot year with contracts written to escalate at 3% per year. Assuming the project is built in 18-months:
2020: 50,000 AFY x $550 AF = $27,500,000 in net operating income
2021: $28,325,000 net operating income
2022: $29,174,750 net operating income
etc. for perpetuity lets say and assume they continue to operate forever...now how do we value this free cash flow?
Easy as a perpetual annuity payment since we expect these contracted cash flows to continue forever. (though the project is planned for 40-years, we expect it could operate till the watershed runs out of water).
$27,500,000/Discount rate = Free Cash Flow to Cadiz
Now what is the appropriate discount rate? Well the company debt financing to date is at least 7-8% and equity typically costs more (10% is the Warren Buffet general discount rate) but lets be generous, subtract escalation and round it so the total cost of capital for Cadiz is only 7% so:
$27,500,000/7% = $589M PV free cash flow to Cadiz! Now we know the project will cost money to build ~$250M and holds $63M in debt so we have to pay that off before we can claim money as shareholders. This means
$589-$250-$63 = $276M in equity value remaining.
So $276M/shares outstanding or 276,000,000/22,200,000 = $12 per share! But wait we still need to handle the convertibles... Now since Apollo holds convertibles at $6.75 we can assume that they will convert these bonds into stock causing an additional 12,700,000 shares to be issued that means that the fully diluted shares outstanding is 34,900,000...
But $276,000,000/34,900,000 = $7.91 per share WTF!!?!?! How can we be waiting all these years for this project and the stock be trading for more than the project is actually worth once built??? Well Apollo clearly knew what was going on and price their convertibles under fair value...
Of course while SB 120 passed, the project also still needs to finalize proposals with the Metropolitan Water District which represents coastal Southern California counties from San Diego to Los Angeles and there have been accusations of bribery and corruption overhanging contracting. And the project needs to clear the State Land Commission which is holding hearings to review the project's planned use for State Lands. These lands are leased for rail road use and Cadiz plans to sublease the lands for water pipeline construction. So hopefully, maybe, the project gets built by the end of 2019 or more likely 2020 so we will have to continue waiting....
Since just over 50% of the project is institutionally held, it seems like retail money is left holding the bag on this much hyped and contested water project. Sadly Cadiz seems like another much hyped story stock that caught retail investors in a value trap.
