Desjardins Securities analyst Gary Ho expects a positive reaction from the Street for Ag Growth International Inc.’s third-quarter earnings beat and guidance raise.
However, he warns “some optimism has already been baked into the share price,” noting it is up 14.5 per cent since his quarterly preview was published on Oct. 24 versus a 3.9-per-cent gain for the TSX.
“After heavy investments in product and regional expansion, AFN is primed to leverage its size and scale in the centre of a global food infrastructure buildout, with exposure to an ag supercycle,” said Mr. Ho. “Our positive investment thesis is predicated on: (1) strong growth across all segments; (2) U.S Farm and International market share growth; (3) margin expansion; and (4) deleveraging.”.
After the bell on Tuesday, the reported adjusted EBITDA for the quarter of $76-million, topping Mr. Ho’s $67-million estimate and the consensus forecast on the Street of $62-million. It also raised its full-year guidance by 6 per cent to $228-million (from $215-million), which the analyst thinks “leaves room for upside.”
“3Q margin of 19.0 per cent was well above our 16.4 per cent and the Street’s 16.0 per cent, driven by operational efficiencies, a higher mix of Farm portable (vs permanent, but starting to normalize), increased Commercial volume and lower steel prices,” said Mr. Ho. “AFN is making solid progress on its mid-term goal of a 16–17-per-cent annual margin, now in the ‘5th or 6th inning’.”
“Backlog was up 4 per cent year-over-year. While growth seems slower, last year’s record backlog was up 99 per cent year-over-year, current backlogs are longer and dealers’ early orders were placed post-3Q.”
Raising his earnings estimates for 2022 and 2023, Mr. Ho increased his target for Ag Growth shares to $55 from $53. The average on the Street is $5.26.
“AFN was our favourite heading into 3Q,” he noted.
Elsewhere, iA Capital Markets’ Matthew Weekes cut his target by $1 to $50 with a “buy” rating.
“AFN delivered strong operational performance in Q3/22, with EBITDA and earnings beating estimates on an adjusted basis, driven by expanded margins on operational efficiencies, a favourable sales mix, and lower steel prices. Revenue was in line with our estimate with strong growth across multiple geographies and platforms. AFN updated its 2022 guidance and is on track to deliver a very strong year with 30-per-cent projected Adj. EBITDA growth mostly driven by organic growth. While we expect demand across AFN’s business to remain strong, we do see growth moderating, which is indicated by a lower year-over-year backlog growth in the quarter. AFN notes significant efficiency improvements achieved in its Commercial segment and expects to realize the benefits of these initiatives going forward. Our 2023E Adj. EBITDA is modestly increased as we raise our margins but temper sales growth assumptions. This is offset by changes to our valuation,” said Mr. Weekes.