Sterling Suffolk Hydroponics EIS

Deadline: 30 Apr 2018

Global population is set to reach 9.8 billion by 2050. Meanwhile, food resources are depleting. If the current trend continues, within 25 years the UK could have to import over half of our food.

Hydroponics, a method of growing plants without soil, could help bridge the gap between supply and demand. Indeed, the hydroponics market is forecast to grow 16% a year.

The Sterling Suffolk Hydroponics EIS aims to exploit this opportunity. It is raising £5 million to help fund the construction and operations of an 8-hectare glasshouse that will produce tomatoes hydroponically.

Highlights

  • EIS opportunity to grow tomatoes hydroponically in a market forecast to grow 16% a year
  • Highly experienced management team and counterparties
  • 5-year rolling supply agreement with premium retailer Waitrose
  • Target EIS raise £5 million in first round with £2 million already secured
  • Target return of 2.2x (after tax relief) 1.5x (before tax relief) after five years – not guaranteed 
  • Minimum normally £100,000 but can be reduced to £10,000 for Wealth Club members by special agreement
  • Supported by an established institutional investor
  • Closing date 30 April 2018
  • Allotting in 2017/18 tax year and 2018/19 tax year (deadline for allotment this tax year 11am on 5 April)

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The opportunity

Every day the world population grows by 200,000 people. All of them need feeding. By 2030, farmland per capita is likely to decrease from 2,200m² to 1800m².

Hydroponics could help bridge this gap between demand and supply. 

It is an established method of growing plants in sand, gravel or liquid, using mineral nutrient solutions but without soil. Using hydroponics has both environmental and health benefits. 

By eliminating soil there are no soil-borne pests or disease, so fewer pesticides are required compared to traditional farming. This, in turn, helps reduce soil erosion as well as air and water pollution. 

Crops can be grown virtually anywhere, lowering transport emissions and providing consumers with fresher goods. Food currently travels an average of 1,500 miles before reaching our plates.

Moreover, as the plant receives optimum nutrition throughout its growth, the resulting crops have superior taste and higher nutrients.

The global hydroponics market is anticipated to grow to US $724.87 million by 2023. Improved yields, higher return on investment, and protected environment among others, are helping attract producers as well as investors.

Europe is the fastest-growing region, forecast to grow 16% a year, with the Netherlands and Spain leading the way. 

In the UK, the market is still developing and is currently quite fragmented.

The offer 

Sterling Suffolk Limited (“SSL” or the “Company”) has been set up by a highly experienced management team to exploit the potential of hydroponics and capitalise on the growing demand for British produce and alternative farming. 

SSL intends to construct an eight-hectare glasshouse (an area equivalent to 12 international football pitches) to grow premium tomatoes on its leasehold site near Ipswich, Suffolk. The Company’s main buyer, Suncrop Produce Limited (“Suncrop”), has a secured a rolling five-year supply agreement with premium retailer Waitrose.

The project is expected to require over £22 million of funding overall. An established and well respected institutional investor is providing a debt facility of £15 million and the remaining £7 million is expected to be raised through successive rounds of EIS funding. 

In this initial round, SSL aims to raise £5 million under EIS. £2 million has already been raised. The round will close when the target is reached, expected by 30 April 2018. Shares will be allotted either side of the tax year end, giving investors the opportunity to use carry back to 2016/17 if they want. 

This offer is expected to be fully subscribed by 30 April 2018.

Target returns

This is projected to be a highly cash generative and profitable operation with profits of over £1.7 million on turnover of £8.5 million by year 5. It targets returns of 2.2x after tax relief and 1.5x before tax relief for EIS investors. Please note returns are not guaranteed. 

The site has been prepared and the glasshouse is under construction with the first phase expected to complete at the end of the year. 

Once the first phase is completed there will be 5.6 hectares of operational glasshouse to start producing crops and generating revenue, whilst construction is completed on the remaining 2.7 hectares. The main buyer, Suncrop, has a rolling 5-year supply agreement with Waitrose. The final phase, with the remaining 2.7 hectares, is expected to complete in December 2019.

It’s worth noting SSL also has planning consent to construct a further 8-hectare glasshouse in the neighbouring field. This could provide an opportunity to scale up and achieve further operational efficiencies. This would be subject to a separate investment round and has not been included in the projections or target returns.

Exit strategy

As with all EIS companies, there is the option of a sale to trade or another investor, refinancing or a stock market listing.

What to consider

This is a high-risk single company investment: capital is at risk. Please ensure you read the report and the Information Memorandum carefully. You should not invest money you cannot afford to lose. Returns are not guaranteed. The value of tax benefits depends on circumstances and tax rules can change.

Our view

In our opinion this is a quality opportunity to invest in a project in a growing UK market, although you should form your own view. It offers experienced investors the potential of good returns and EIS tax relief while providing a benefit to the UK agriculture and the environment as a whole. 

Hydroponics is an established method of food production and is growing fast in Europe. The management team and counterparties are highly experienced and incentivised and are investing significant capital themselves.

The project requires sizeable capital outlay, but the 5-year supply agreement with Waitrose provides some visibility of earnings. Should the team be successful in extending the glasshouse facilities and scale up the operation, it could achieve a higher exit value – not guaranteed and not included in the return forecasts. 

Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 23 March 2018.

The details

Type
Single company
Sector
Agriculture
Target return
1.5x
Funds raised / sought
£2.7 million / £5 million
Minimum investment
-
Deadline
30 Apr 2018

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