In response to stronger-than-anticipated 2024 guidance, Desjardins Securities analyst Gary Ho raised his earnings expectations for the next two years from Ag Growth International Inc. (
“AFN reported an in-line 4Q driven by robust 19.3-per-cent margin, offset by softer revenue,” he said. “Management introduced better-than-expected 2024 guidance (vs consensus) of $310-million-plus, with sustained margin at 19.0 per cent; based on the last two years’ track record, we believe there may be some conservatism built in. Solid deleveraging (expected leverage of 2.5 times) gives AFN optionality to invest in organic growth, starting in India.
In a research report released Thursday titled Harvesting the fruits of margin expansion and sowing the seeds of organic growth, Mr. Ho said he upside to the Winnipeg-based company’s guidance for the current fiscal year, seeing “a gradual ramp-up through the year (2H stronger vs 1H)”
“AFN delivered EBITDA 1317 per cent higher vs its original guidance in 2022 and 2023,” he said. “We increased our 2024 EBITDA [estimate] to $318-million (was $310-million).”
Keeping a “buy” recommendation, Mr. Ho increased his target for Ag Growth shares to $85 from $82 with a “buy” recommendation. The average is $77.69.
“AFN is entering a new era with three key areas of focus — profitable organic growth, operational excellence and balance sheet discipline,” he concluded. “Our positive investment thesis is predicated on: (1) broad-based growth across segments and regions; (2) margin expansion through operational excellence; (3) deleveraging; and (4) a step-up in organic growth through product transfers/other initiatives.”
Other changes include:
* Scotia’s Michael Doumet to $88 from $83 with a “sector outperform” rating.
“First and foremost, AFN is a story of enhanced execution,” he said. “Previously a loose combination of acquired businesses, in the last couple of years, management has integrated functions, improved manufacturing efficiencies, and coordinated an organic push across its geographies. The outcome of this heavy lift has been much higher profitability. There is still more to do — and more to gain, in our view.
“In 2023, EBITDA margins stepped up sizably and, in our view, will stabilize (or build higher) as revenue growth re-accelerates. The bulk of the re-acceleration is being driven by (i) company-specific initiatives and (ii) secular dynamics in International. To us, the 2024 EBITDA guide should clear the deck in terms of investor concerns that profits may moderate in 2024 as the ag cycle softens. Instead, we believe investors should view AFN has having reached a tipping point, where margin improvement, higher FCF, and lower leverage free up capital to pursue market-beating growth — such that AFN can become a double-digit organic compounder. Contrasting that view with its discounted trading multiple (6.5 times EV/EBITDA on our 2024; 30-per-cent discount to historicals) highlights the upside opportunity in the shares.”
* National Bank’s Maxim Sytchev to $82 from $75 with an “outperform” rating.
“Amid news of Deere forecasting revenue to be down 10 per cent in 2024 and USDA seeing a 26-per-cent reduction in farm incomes, AFN’s guide should be perceived in a more favourable light, as a result,” said Mr. Sytchev. “We are also pleased to see the company’s trajectory when it comes to margin improvements while the path towards a $2-billion top line is being achieved via organic investments; we continue to believe that AFN is structurally undervalued.”
* Raymond James’ Steve Hansen to $72 from $64 with an “outperform” rating.
“We are increasing our target price on Ag Growth International based upon: 1) the company’s solid 4Q23 print; 2) rapidly improving India demand fundamentals; & 3) sustained strategic progress (organic growth, product transfers, deleveraging). We have also rolled our valuation forward to 2025,” said Mr. Hansen.
* ATB Capital Markets’ Tim Monachello to $85 from $81 with an “outperform” rating.
“Overall, we believe AFN is uniquely positioned over the coming years with a strategy that has 1) driven strong organic growth (AFN has grown revenue by 15 per cent per year since 2020), 2) driven sustainable margin expansion (AFN believes it has achieved 200bps of structural margin improvement with more to come), and 3) has delivered meaningful deleveraging alongside operational diversification (international to grow revenue contribution to 40-45 per cent by H2/24e). We believe this improving operational position is dislocated from AFN’s valuation that continues to trade below its historical trading range,” he said.