CIBC Raise TargetEQUITY RESEARCH
November 17, 2022 Earnings Update
AG GROWTH INTERNATIONAL INC.
Lunch With The New CEO
Our Conclusion
We had the opportunity to host AFN’s new CEO, Paul Householder, and
CFO Jim Rudyk on November 17 for a group investor call. Management
remains bullish for 2023, driven by continued strong organic revenue growth, margin expansion and strengthening of the balance sheet. The company has a strong backlog position and is not seeing pushback from
farmers/customers despite the current macro-inflationary environment. We are raising our 2023 estimates to reflect higher margins. Our price target increases from $48 to $53 and we maintain our Outperformer rating.
Key Points
1) Expect Strong Organic Revenue Growth To Continue: Management
noted that it is seeing strong agriculture fundamentals across its segments and regions. The double-digit backlog growth (excluding Russia/Ukraine) provides good visibility into Q4/22 and early 2023. Both Canada and U.S. Farm segments should continue to perform well (portable equipment demand has been strong; pent-up demand for permanent storage now emerging). Momentum in the North American Commercial platform (sales up 27% Y/Y in Q3/22) should continue. Brazil (backlog up 59% Y/Y) should continue to post solid results in 2023, driven by strong fundamentals (potential for a record crop in 2023) and the introduction of new products (fertilizer, food, and feed). The India business is now twice the size vs. the time of acquisition in 2019. The new bin and handling line in India has not had a meaningful impact to YTD results, and should be another tailwind for growth in 2023.
2) Confident In Achieving 17% Adj. EBITDA Margin Target In Short To
Medium Term (Above Consensus): AFN’s adj. EBITDA margin was just
under 15% in 2020 and 2021, with 2022 margins tracking at ~16%. Looking ahead, AFN is confident that it can hit a 17% margin. Note that consensus estimates imply a margin of 15.9% in 2023 and 16.4% in 2024. AFN sees three drivers for margins: 1) operational excellence program that was started over a year ago (AFN still sees more opportunities for operational improvements); 2) operating leverage/scaling of costs as revenues continue to grow; and 3) enhanced pricing strategy, which is now much timelier (from bi-annual to bi-weekly in some cases), thereby protecting margins.
3) On Track To Meet Leverage Targets By Late 2023/Early 2024: The
near-term priority remains on debt reduction; M&A or an NCIB is not the
current focus for the company. Overall net debt/EBITDA has improved to ~4x as at Q3/22 end vs. ~5x at 2021 end. AFN expects to end 2022 with a 3.6x- 3.7x ratio and is targeting a low 3x ratio by the end of 2023. At that point, AFN will evaluate what to do with its excess cash, which could include meaningful investments to support future organic growth (in particular to high-growth regions such as Brazil).