Very good upside here. Ave target price $48.11
Scotia Capital analyst Michael Doumet thinks the setup for Ag Growth International Inc. (
) “may be as good has it has been for a while.”
Expecting profit growth to accelerate and seeing a free cash flow inflection point, which he calls a “major catalyst,” he raised his rating to “sector outperform” from “sector perform” on Wednesday, believing it’s “time to decompress.”
“The shares trade at the lowest EV/NTM EBITDA [enterprise value to next-12-month earnings before interest, taxes, depreciation and amortization] multiple in more than a decade,” said Mr. Doumet. “Strong growth prospects and moderating steel prices (30 per cent of COGS in 2020) should boost profits and cash flows into 2022. We think its leverage has peaked. And its margins are likely to improve from its 3Q21 low-point. Further, with one of the bin projects remediated, we see little incremental risk of negative surprises and believe AFN will look to fully resolve the issue in 2022. The wind-down of the bin incident and wind-up of profits should enhance FCF (15-per-cent yield) and ROIC [return on invested capital], accelerating the prospects for delevering and, therefore, aiding the shares to re-rate higher.”
He raised his target for the Winnipeg-based company’s shares to $45 from $39. The current average is $48.11.
“AFN shares lagged those of other ag equipment companies in 2021,” he noted. “Today, at 7.5 times EV/EBITDA on our 2022, AFN shares are trading at their lowest level in over a decade. Last year, higher steel inputs, a cash drag from WC, and the bin incident collectively weighed on margins, cash flows, and its trading multiple. As these headwinds reverse (or are resolved), we expect profits, cash flows, and its multiple to expand. Our valuation multiple of 8.5 times on our 2023 is below AFN’s historical average of 9.0 times and our 2023 is conservatively below consensus – despite that, our target implies significant upside.”