CIBCEQUITY RESEARCH
February 2, 2023 Company Update
AG GROWTH INTERNATIONAL INC.
2023 Investor Day Takeaways
Our Conclusion
AFN held an Investor Day in Toronto today. Overall, we thought that AFN
provided a very confident outlook for top-line growth (mid-term revenue run-
rate goal of $2B and long-term of $3B vs. TTM Q3/22 at $1.4B), margin
expansion (rehashing 2023 adj. EBITDA target of 17%; note consensus sits
at ~16%) and deleveraging (less than 4x net debt / EBITDA by 2022-end and
target of 2.5x by 2024). While AFN did not provide specific 2023 financial
guidance (likely to be released with Q4/22 results in early March), the
company indicated that it is “highly confident” in 2023 adj. EBITDA growth.
We maintain our $62 price target and Outperformer rating.
Key Points
Profitable Organic Growth Will Continue In The Years Ahead: AFN
provided a detailed account of how it intends to support continued organic
growth in the years ahead, driven by: 1) robust International market growth
(International makes up 35% of sales mix currently; AFN sees this getting to
50% over the mid-term); 2) product transfers across regions (raising total
addressable market by over $4B; target of 20% market share for each
product); 3) expanding from grain/handling into processing (multi-billion dollar
opportunity); and 4) increasing higher-margin spare parts/services business
(goal to increase sales mix to 10% vs. very little today).
Operational Excellence / Reiterating 17% EBITDA Margin Expectation
For 2023: LTM adj. EBITDA of 16.2% represents an improvement of
~130bps since 2020. AFN expects to get to a 17% margin in 2023. Key
levers include operating leverage from revenue growth, pricing management
discipline, continued cost improvements and efficiencies (management
providing a 6th inning baseball analogy), and increasing share of high-margin
parts/services. After a heavy M&A period through 2020, AFN is still in the
process of integrating and centralizing key functions, which should continue
to eliminate cost redundancies across supply chain and manufacturing.
Continuing To Emphasize Balance Sheet Discipline: AFN reiterated that
debt repayment is a high priority (net debt / EBITDA going from 4.1x at Q3/22
to low 3x by 2024-end). In addition to higher EBITDA generation, AFN
expects higher FCF from working capital management (target net working
capital as % of sales of 10%-12% vs. 16% as at Q3/22) and a disciplined
approach to capex spend (no intentions for M&A for the next 12-18 months).
Board Chair Transition: Separately, AFN announced that Bill Lambert is
stepping down as Chair of the Board in May 2023 and will be replaced by
Janet Giesselman. We believe the change will be viewed positively as AFN’s
focus tuns to operations. Bill’s background is mostly private equity / merchant
banking, while Janet is currently on the board of Corteva/McCain and has
over 30 years of experience in the agriculture / chemicals industry