Ag Growth International Inc T.AFN

SCOTIA - STAY LONG MY FRIENDS MORE TO COME $$$$

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A Step Change Quarter

OUR TAKE: Positive. 2Q EBITDA beat consensus by 17%. Compared with the Street, sales were 9% lower, but that was more than offset by higher margin. On the back of the strong margin performance, the company raised its 2023 EBITDA margin guidance to “at least 18%” from 17% (vs. the Street at 16.5%). Most impressive: the stronger margin performance came with lower sales, which provides confidence that higher margins are a structural – and not cyclical – story (i.e. more operational improvements than operating leverage). AFN raised its 2023 EBITDA guidance to “at least $290 million” from “at least $265 million” and the company expects to reduce net debt leverage to ~3x by the end of 2023, even after the cash settlement for the bin failure.

The ag space is inherently cyclical (although less so for AFN). That said – the main story here is that higher profit margins, reduced capital outlays (capex/WC), increased FCF generation, debt repayment, and multiple expansion – when combined to the extent we believe can materialize for AFN – should accrue significant value for shareholders. Using the low-end of its 2023 EBITDA guide, AFN trades at 6.6x EV/EBITDA (vs. its historical multiple of 9.0x). We will update our estimates following the company’s conference call tomorrow at 8 am.

KEY POINTS

AFN reported 2Q sales/EBITDA of $390 million/$88.2 million versus consensus of $429 million/$75.2 million. On a consolidated basis, sales was flat while EBITDA grew 33% y/y. EBITDA margins expanded 565bp.

• Farm sales/EBITDA increased 3%/37%. The increase in sales was driven by well-executed growth strategies and product innovation. Farm EBITDA margins of 30% increased 740bp driven primarily by operational excellence initiatives targeted at manufacturing efficiency, a favourable mix of portable equipment, and progress made in the digital reorganization.
• Commercial sales decreased 4% while EBITDA increased 22%. Sales were negatively impacted by reduced demand in the food platform and cyclical nature of large commercial projects in North America. However, EBITDA margins of 18.6% expanded 390bp due to efficient cost management.
• Other EBITDA (i.e. corporate costs) was -$10.9 million versus -$8.9 million last year.
• By region, sales increased 2% and 7% in Canada and International, partially offset by 5% lower sales in the U.S.
• Order book grew 3%, with Farm (+27%) and commercial (-10%). The Farm order book in Canada grew 77% as demand fully recovers from the 2021 drought impact, which impacted demand throughout 2022.

The company raised its full year guidance of adjusted EBITDA and margin due to positive sales momentum from 1H23, significant order book, operational excellence initiatives and strong margins.

Net debt to EBITDA as per the company’s calculation was 3.3x as at the end of 2Q (vs. 3.6x as at 1Q). On July 27, the company announced the resolution of the lawsuit by Fibreco related to the commercial grain storage bin failure. As per the release, AFN recorded a $15.6 million pre-tax charge in 2Q23. A cash settlement of $55.1 million accrual is expected in 3Q23.
 

• Pertinent Data

Valuation: 8.5x EV/EBITDA on our 2024E
Key Risks: Farm economics, crop and trade flows, weather, FX (US$), steel prices, competition
Rating	Sector Outperform
1-Yr. Target	C$76.00
AFN-T	C$52.58
1-Yr. Return	45.7%
Div. (NTM)	C$0.60
Div. (Curr.)	C$0.60
Yield (Curr.)	1.1%
ESG Score	NA

Capitalization
Market Cap. (M)	C$993
Net Debt + Pref. (M)	C$908
Enterprise Value (M)	C$1,901
Shares O/S (M)	19

Volume and Closing Price for AFN-T