Scotia ups $1 to $38Rating Sector Perform
1-Yr. Target C$38.00
AFN-T C$32.98 1
-Yr. Return 17.0%
Div. (NTM) $0.60 Div. (Curr.) $0.60 Yield (Curr.) 1.8%
Valuation: 8.75x EV/EBITDA on our 2022E
PERTINENT REVISIONS
New Old
1-Yr Target C$38.00 C$37.00
Adj EBITDA (M)22E $190 $181
Flashing Signs of Positive Momentum into 2022
OUR TAKE: Positive.
3Q21 results were largely as expected and consistent with the company’s guidance. The outlook, however, offered several positives insights into how revenue growth is expected to accelerate and margins expand into 2022, such that the story may be hitting a turning point.
AGI’s base business has been performing well through 2021. The favourable backdrop had enabled the company to capitalize on growth opportunities. The company’s guidance and commentary (when put together, plus doing a little bit of math), suggest that 4Q21 sales can grow approximately 40% y/y. That would mark a serious sequential acceleration. Assuming that is (mostly) sustainable, it could prove promising for 2022. At the same time, margins appear to have inflected as (implemented) price increases will enable the company to recapture margins (mostly in 4Q21 and more so in 2022). Finally, as it relates to the bin failures, the negative surprises seem to have paused for now. Altogether, we view the outlook and commentary as positive.
KEY POINTS
AGI reported 3Q sales and adjusted EBITDA of $314 million and $46.3 million, compared with consensus of $329 million and $48.5 million. Results were consistent with the guidance provided in its the October 14 release. The company reaffirmed its forward guidance of strong sales and adjusted EBITDA growth in 4Q21 and full-year EBITDA of at least $170 million.
AGI’s 2021 EBITDA guidance of >$170 million implies 4Q21 EBITDA of >$39 million. Working backwards to revenues (assuming similar margins to 4Q20 as indicated on the conference call), revenues in 4Q21 should exceed that of 3Q21. Given 4Q21 is typically seasonally weaker than 3Q21, the guidance implies an acceleration in organic growth profile – which would be bullish if maintained in 2022.
On the bin failure, the company indicated that the remediation work is nearly complete at one site and the company did not increase its accrual (of $78 million) having spent $41 million to date. The company also announced an initiative to consolidate its Commercial platform operations in a centralized office in Chicago. Specifically, the initiative will bring together sales execution, product management, and customer service teams covering Farm permanent and Commercial projects in North America. Associated costs will ramp in 2022 but are expected to provide revenue and cost synergies thereafter. As at 3Q21, net debt to EBITDA was 5.3x (up from 5.1x in 2Q21)
AGI reported 3Q21 sales and adjusted EBITDA $314 million and$46.3 million, compared with consensus of $329 million and $48.5 million (see Exhibit 1). Recall, concurrent with its convertible debenture offering, the company provided guidance that 3Q21 EBITDA would be below that of 3Q20.
While EBITDA fell short of consensus (as expected), the company reaffirmed its 2021 adjusted EBITDA guidance of “at least $170 million”. On the conference call, management indicated that 4Q21 margins would be similar or better to that of 4Q20. The company’s 2021 EBITDA guidance of >$170 million implies 4Q21 EBITDA of >$39 million. Working backwards to revenues (assuming similar margins to 4Q20, as communicated on the conference call), revenues in 4Q21 should exceed that of 3Q21. Given 4Q21 is typically seasonally weaker than 3Q21, it marks an acceleration in organic growth profile.
The outlook is underpinned by strong momentum and backlog at record levels with good visibility. Specifically, management highlighted the following: (i) consolidated backlog is up 99% y/y; (ii) it has good visibility on converting the backlog with no issues related to securing third-party components (i.e. no obvious supply chain risks); and (iii) the backlog has a longer duration.
In terms of segment results:
• Farm sales grew 11% with increases across all regions. Canada (+2%) saw continued demand for portable and permanent handling equipment. U.S. (+12%) experienced strong demand for storage and portable equipment due to dealer restocking. Strong sales growth in Brazil (+128% y/y) drove a 40% increase in International sales (EMEA and APAC were down 44% and 3%, respectively). Total Farm backlog was up 202% y/y.
• Commercial sales grew 10% with outsized growth in the Food platform (+46%) and modest growth in the Commercial platform (5%). On a regional basis, sales growth in the U.S. (+6%) and International (+19%) due to project timing, was offset by weakness in Canada (-9%), due to COVID-19 impacts on grain terminal and fertilizer sectors. Total Commercial backlog was up 76% y/y.
• Technology segment sales increased 49% y/y due to an expanded product offering (in Canada) and the onboarding of new dealers (in the U.S.)