Ag Growth International Inc T.AFN

Alternate Symbol(s): T.AFN.DB.G | T.AFN.DB.H | T.AFN.DB.I | T.AFN.DB.J | T.AFN.DB.F | AGGZF

Industrials

Ag Growth International Inc. is a provider of the equipment and solutions required to support the storage, transport, and processing of food globally. The Company provides equipment solutions for agriculture bulk commodities, including seed, fertilizer, grain, rice, feed, and food processing systems. It has manufacturing facilities in Canada, the United States, Brazil, Italy, France, and India and distributes its products globally. Its segments include Farm and commercial. Its Farm segment focuses on the needs of on-farm customers, and its product offerings include grain, seed, and fertilizer handling equipment; aeration products; grain and fuel storage solutions, and grain management technologies. Its Commercial segment focuses on commercial entities, such as port facility operators, food processors and elevators. Its product offerings include larger diameter grain storage bins and high-capacity grain handling equipment; food and feed handling storage and processing equipment.

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Ag Growth International Inc

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Post by SunsetGrillon Jul 04, 2023 3:42pm

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Post# 35526213

Scotia Update $76

Agriculture

Ag Growth International Inc.

AFN-T: C$50.67
Target: C$76.00
Rating: Sector Outperform

Keep Calm and Harvest On

OUR TAKE: Mixed. Crop prices, farmer sentiment, and farmer incomes are moderating. Drought conditions in several states in the U.S. – if materialized through to harvest – could weigh on AFN’s portable handling sales in the region, but could prove supportive of crop prices and a benefit to farmers in other regions (DE-US and AGCO-US shares are up in June). Of note, AFN’s revenue drivers are more closely correlated to crop production, grain infrastructure spend, and crop trade flows. At this juncture, given the macro uncertainty and higher rates, we are taking a more conservative approach to our revenue forecast – flattening growth expectations in 2024 – but still anticipating favorable margin trends.

We view AFN as still being in the middle innings of its harvest. Having acquired several businesses since 2016, we see AFN undergoing a more thorough consolidation effort, centralizing operations and realizing efficiencies. Also, it has several opportunities to gain market share. We expect higher profit levels and reduced capital outlays (capex/WC) to lead to a FCF ramp, debt repayment, and multiple expansion. AFN trades at 6.8x EV/EBITDA on our 2023E (below historical of 9.0x) and has an ~11% FCF yield.

KEY POINTS

With its Q1 update, AFN raised its 2023 EBITDA guide to >$265 million (from >$260 million). Despite macro uncertainty/higher rates, we see upside to AFN’s guide, with our view being that the guide was set conservatively. On margins, we expect the restructuring of AGI Digital and the elimination of cost redundancies (to eventually realizing cost efficiencies) from the (i) centralization of NA Commercial platform and (ii) food unification project will drive considerable SG&A savings through 2023 (nearly $10 million per Q). Combined with the strong backlog, we see upside to Street 2023 estimates (particularly for 2Q/3Q).

While we continue to expect strong growth in Canada through the balance of 2023, we tempered our growth expectations in the U.S. The current estimate from the USDA is for U.S. farmer income to decline 16% in 2023 versus 2022, however it would remain relatively high versus historicals. In Brazil, the M-T outlook has not changed, the crop volume is increasing and export are very favorable (a positive driver for AFN), but we expect a strong 2H23 ramp, due to uncertain political backdrop and high interest rate environment (government programs may restart in 3Q23). We expect India to continue to perform well, while activity levels in Africa continue to rise.

From >5x of net debt to EBITDA, we forecast net debt leverage declining to 3.2x by the end of 2023 (including the settling provisions/bin issues) and declining to below 3.0x in 2024. As leverage ratios moderate, we expect AFN’s strong FCF generation (~$5.40/share to $5.50/share in 2023E/24E) to be increasingly supportive of its trading multiple/valuation.

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Note: The payout ratio is calculated based on dividend as a percentage of FFOPS.