AGI (Ag Growth International)
Q3/22 results above expectations, outlook remains constructive
TSX: AFN | CAD 37.21 | Outperform | Price Target CAD 55.00
Sentiment: Positive
Our view: We expect a positive reaction to Ag Growth shares from a better than expected Q3 performance which led to 2022 guidance being revised slightly higher. We continue to have a favourable view on Ag Growth based on a combination of strong ag infrastructure demand, a favourable ag cycle, high crop volumes, and ramp-up of several newer businesses segments.
Actual: $76M EBITDA | RBCe: $55M | Cons.: $64M
Outlook: Ag Growth raised their guidance slightly for 2022, with EBITDA expected to come in at >$228M (vs. $215M prior, $219M consensus and $217M RBCe), driven by strong Q3 performance, backlogs that remain relatively high (+4% y/y, although down from +19% y/y in Q2), and ongoing advantageous market conditions. Management expects Q4/22 results to be similar y/y to Q4/21 in the Farm segment ($25M EBITDA in Q4/21 vs. $37M EBITDA in Q4/22 RBCe) implying some demand pull-forward was experienced in Q3. Commercial sales are expected to remain high in Q4 on continued demand and solid backlogs (+6% y/y).
Summary: Q3/22 results were stronger than expected due to higher sales ($402M actual vs. $356M RBCe), while EBITDA margins were also ahead of our estimates (19.0% actual vs. 15% RBCe and 15% in Q3/21). Margins benefited from a sales mix tilted towards higher margin portable grain handling equipment, incremental margin gained on a higher revenue base, and improving costs as steel prices pulled back over the quarter. We note this strong performance was despite a negative EBITDA contribution from the digital segment due to a switch to more subscription-based sales.
In the Farm segment, sales were above expectations ($208M actual vs. $190M RBCe), driven by solid demand in North America as dealers remain low on inventory in addition to continued growth in International sales. In the Commercial segment, sales were also higher than expected ($182M actual vs. $152M RBCe), due to rebounding Canadian sales, robust growth in the Food Platform segment, and U.S. and International markets that continue to experience strong growth. In the Digital segment, sales fell slightly short of our forecast ($12M actual vs. $14M RBCe), as solid order intake was offset by chip shortages restricting sales.