TD Analysis Ag Growth International Inc.
(AFN-T) C$52.58
Q2/23 First Look
Michael Tupholme, CFA
Recommendation: BUY
Risk: HIGH
12-Month Target Price: C$77.00
12-Month Dividend (Est.): C$0.60
12-Month Total Return: 47.6%
Event
AFN reported record quarterly adjusted EBITDA of $88.2mm, which was
~17% above consensus of $75.2mm. The beat was driven by exceptionally
strong margins, which more than offset lower-than-expected revenues.
Management increased its 2023 adjusted EBITDA guidance to "at least
$290mm" (vs. "at least $265mm", previously), which compares favourably to
consensus of $267.6mm. Similarly, AFN increased its full-year adj. EBITDA
margin target to "at least 18%" (was 17%, and consensus at 16.6%).
Conference call at 8:00 a.m. ET (1-800-319-4610).
Impact: POSITIVE
Although revenues missed expectations and were flat y/y, exceptionally strong
margin performance drove a meaningful adj. EBITDA beat and saw AFN
notably increase its 2023 adj. EBITDA guidance.
Margins are benefiting from AFN's various operational excellence initiatives
(includes manufacturing efficiencies, centralized procurement, structured pricing
programs, and workforce optimization). Encouragingly, management expects
the benefits of these efforts to be sustained through the rest of 2023 and
into 2024.
Q2/23 adj. EBITDA was $88.2mm vs. consensus/TD at $75.2mm/$75.9mm.
Adjusted EBITDA margin was 22.6% (+565bps y/y) vs. consensus of 17.5%
and TD at 17.3%.
Farm segment EBITDA margin was 30.0% (+740bps y/y and well above our
23.1% estimate), supported by manufacturing efficiencies, a mix tilted toward
portable equipment, and Digital reorganization progress.
Commercial segment EBITDA margin was 18.5% (+390bps y/y; above
our 14.8% estimate), with the y/y improvement supported by effective
manufacturing expense management.
Revenue was $390.3mm (flat y/y), below consensus/TD at $428.5mm/
$439.1mm. Farm segment sales were +3% y/y (supported by healthy growth
in Canada), while Commercial segment sales were -4% y/y (hurt by large
commercial project cyclicality in North America and ongoing food platform
softness).
Outlook: AFN's new full-year 2023 adj. EBITDA guidance of "at least $290mm"
implies H2/23 adj. EBITDA of at least $153.7mm, which is ~6% above H2/23
consensus of $144.7mm.
AFN's overall order book was +3% y/y at quarter end (Farm +27% y/y;
Commercial -10% y/y). Commercial weakness reflects the food platform's ongoing
reset and fertilizer market softness.
AFN's total net leverage ratio was 3.3x (down vs. 3.6x in Q1/23). Management
continues to expect leverage to trend towards the three-times level by YE2023.