Scotia report of AGT - May 14, 2018
AGT Food and Ingredients Inc. (AGT-T; C$16.63; SP) Largely in Line; Looking for W/C Reversals OUR TAKE: AGT reported Q1 results that were in line with consensus. That said, FCF came in below our expectations with a drag of $22M. Management expects a reversal in working capital and a positive contribution of $30M to $40M by the end of Q3. While we believe that we are at trough levels in terms of profitability, we are seeing signs that the recovery is taking longer than expected (inventory levels remain elevated in Canada; crop rotation is slow in India). Furthermore, working capital has yet to exhibit a material reversal despite a conducive environment, in our opinion. As such, we remain Sector Perform.
Full Report by George Doumet:
-----------------------------------------
KEY POINTS AGT reported Q1/18 Adjusted EBITDA of $16.1M, above our estimate of $13.7M and in line with consensus at $15.5M. Results reflect a strong YoY improvement in margin at the company’s Food Ingredients business, as well as higher-than-anticipated volumes (and margin) from the legacy Pulse & Grain Processing segment. More specifically, by segment: At the Pulse & Grain Processing segment were slightly positive YoY (vs. two previous quarters of double-digit declines). Adj. EBITDA for the segment was $8.7M vs our $6.0M estimate, due to better-than-expected volumes and slight margin improvements from Turkey and North American processed products. On the macro front, the company expects Canadian seeded acreage to decline 7% in 2018; that said total stocks for lentils increased 35% YoY. AGT's expectations are for current dynamics to continue lead to lower seeding intentions in 2019 and price normalization. For the Food Ingredients & Packaged Foods segment, volumes were slightly better than expected, increasing ~7.5% YoY vs our ~6.5% estimate. Adj. EBITDA came in at $10.2M, above our estimate of $8.7M, driven by margin improvement out of the Minot facility, attributable to a better sales mix within pet food and packaged foods, stable input costs, and a high utilization rate. The company expects the business unit will continue to improve as the sales mix shifts favourably and volumes for major CPG companies increase in the coming year (new formulations expected for 2018). FCF generation for the quarter was negative (coming in at -$22M), driven by a continued increase in working capital, contrary to our expectation (and Q4/17 CCall commentary) of a reversal. We note that the company’s anticipated reduction in receivables was pushed back (cited reasons include a delay in invoicing from product in Turkey). Consequently, net leverage increased sequentially to 8.3x (10.7x including preferred securities), compared with 7.3x (9.5x) in Q4/17.
Investment Thesis We remain on the sidelines until we get a better read on the duration of the current global imbalance in the pulse market (looking for crop rotation away from lentils and pulses and lower seeding intentions in both Canada and India). In our opinion, this looks to be at least a few quarters away.