Our view: We expect strong multi-year revenue growth supported by tight global ag markets, while margins should improve with lower steel prices and increased contribution from the higher margin Digital segment. As a result, we forecast strong FCF over the next several years, which should allow AGI to re-invest in the business and de-lever the balance sheet. Additionally, we think risks from the grain bin failure are fading, but the overhang could remain until the lawsuits are settled.
Key points:
Extended ag cycle supports strong sales growth through 2024: With global ag markets already tight, any significant impact on crop production in Ukraine will likely further tighten already stressed global stocks-to- use ratios while significant sanctions actions and/or export challenges for Russia could further limit grain availability to global markets. As a result, we see the current ag cycle extended and expect high crop prices to continue supporting strong demand for ag equipment. AGI's record order backlogs are indicative of strong near-term revenue growth, while the supportive ag backdrop should support sales growth through 2024. We forecast revenue growth at 12%, 9%, and 7% in 2022, 2023, and 2024.
Margins set to recover as new businesses integrated and steel pressures ease: After peaking at $1600/st in September 2021, US HRC prices pulled back to <$1,000/st in March 2022. Although, there are signs that steel prices have bottomed and could see near-term strength, management has a proven ability to manage through cost pressures, while broadly lower steel prices should support margin recovery. We also expect continued ramp-up in new businesses (Brazil, India, food) should support margin expansion as efficiencies are gained and higher-margin Digital sales grow. We forecast EBITDA margins to expand to 16% in 2022 and 2023 and 17% in 2024, vs. 15% in 2021.
Digital segment primed for growth: AGI has completed several initiatives to help re-position the Digital segment (i.e. diversifying sales channels, automating production, & increasing capacity). While chip shortages could remain a headwind for the foreseeable future, the reintroduction of tradeshows may be a boon for sales, as management noted a high win rate when the sales force could get in front of customers. We forecast 2022 as an inflection year for positive-EBITDA in the Digital segment, and expect strong growth over the next 5+ years, although increased SG&A cost could weigh on EBITDA margins until the sales pipeline is fully established.
Overhang from bin failure incident is fading: With remediation work completed for one of the two impacted customers, management noted there is much more certainty around total costs accrued for the bin failure incident (now $86.1M, +8.6M Q/Q). The company has also completed an information exchange in the ongoing lawsuit, and management has become increasingly confident in their position.
Reiterate Outperform rating, raise price target to $50 from $45: We raise our 2022E and 2023E EBITDA to $210M and $240M, from $195M and $210M, respectively.