Reshaping 2024 Outlook – Q1/24 Review Our Conclusion
AFN reported soft Q1/24 results, primarily reflecting lower-than-expected
Commercial segment sales in Canada & International, but maintained
FY2024 adj. EBITDA (and margin) guidance. The company is expecting
Q2/24 EBITDA to be lower Y/Y, with all of FY2024 Y/Y growth coming in
H2/24 (reflecting some softness in U.S. Farm and the timing of the
Commercial order book). We do expect the stock to be in the penalty box
near-term until the company demonstrates the ability to grow the top line
(2024 EBITDA margins expected to be similar to 2023). There still remains a
solid valuation argument as AFN is trading at ~6x 2025E EV/EBITDA; lowest
since 2010. As the company executes on its solid Commercial order book
this year (and deliverers strong top-line growth in H2/24), we expect the
valuation to normalize. We are reshaping our 2024 estimates (lowering Q2,
raising H2), and are keeping our 2025 estimates largely unchanged. We
maintain our $82 price target and Outperformer rating.
Key Points
Cautious U.S. Farm Business Outlook: AFN noted that it is seeing
challenging conditions in the U.S. but better conditions in both Canada
(healthy order book with resilient portable demand) and International (Brazil).
Note, U.S. Farm is ~25%-30% of AFN’s consolidated business mix. For the
U.S. farmer, there will be better visibility as we get closer to H2/24 as the
crop size firms (typically, volume is the best indicator of portable demand).
Based on USDA Prospective Plantings / Ag. Outlook Forum estimates, the
corn crop is forecast to be just under 15B bu. this year, slightly lower than the
15.3B bu. in 2023, but higher than the 13.7B bu. in 2022.
Visibility For Solid Commercial Business Contribution In H2/24: The
Commercial business is set to outperform in H2/24. AFN expects project
deliveries to pick up in H2/24 from large-scale projects currently underway
(manufacturing ongoing) in all regions, most notably in APAC, Europe, the
Middle East and Africa. Note, AFN’s near-record consolidated order book
(+12% Y/Y) has a heavy tilt towards the Commercial business, which
provides six to nine months of good visibility. Further, management notes
that the delays witnessed in Q1/24 are largely customer delivery timing
issues (nothing fundamental or supply chain related).
Slight Uptick In Leverage Ratio Due To Commercial Inventory
Investment, But Still On Track For <2.5x Ratio By H2/24: AFN’s net debt /
TTM EBITDA ratio was 2.9x at Q1/24 vs. 2.8x a quarter ago, though down
from 3.6x a year ago. The slight tick higher Q/Q was due to inventory
investment required for the Commercial portion of the order book, which
should normalize in H2/24. Management is confident in the leverage ratio
getting to 2.5x or lower, most likely in H2/24