RE:Scotia Analysis ($48)OK then - you all spoke loud and clear - I will keep all these reports to myself
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Rating Sector Perform
1-Yr. Target C$48.00
AFN-T C$39.80
1-Yr. Return 22.1%
Div. (NTM) $0.60
Div. (Curr.) $0.60
Yield (Curr.) 1.5%
Higher Input Costs (Temporarily) Soften the Profit Ramp
OUR TAKE: Modest Negative.
There were several moving parts in the results and outlook. Overall, our takeaway from management’s commentary was that the 1Q21 beat came at the expense of lower 2Q21 and 3Q21 expectations. The dynamic that is playing out is similar to several manufacturing companies, whereby customers have pulled forward purchases (to get ahead of price increases) and whereby, despite price passthroughs, the company expects to face incremental margin pressure in 2Q21 and 3Q21. While management talked down 2Q21 and 3Q21 versus consensus, they thought the company would come in “at or above consensus” (EBITDA of $168 million) for the full year. As such, the primary disappointment in the release and outlook is that the nearterm EBITDA growth catalysts are being deferred. AFN trades at 8.7x EV/EBITDA on 2022E, modestly below its historicals. We believe increased earnings visibility and B/S deleveraging would drive a positive re-rate. KEY POINTS 1Q21 adjusted EBITDA of $39 million was more than 25% ahead of consensus. Farm sales grew 14% and EBITDA margins expanded following the strong demand for portable and permanent handling equipment due to the favorable backdrop (and as dealers sought to get ahead of price increases). Commercial sales grew 8% with a solid rebound in International and the U.S., following a resumption of more normalized customer behaviour as pandemic-related delays have begun to wane, but was partially offset by weakness in Canada. For 2021, management guided to higher overall sales and adjusted EBITDA, consistent with the 4Q20 release, but cautioned on a negative impact to margins from steel (cost and availability) primarily in 2Q and 3Q. Farm is expected to face comparatively more margin pressure than Commercial. In our view, SureTrack’s retail equivalent sales decline is a mostly function of curtailing its subscription model/pricing. Management explained that whereas it previously sold SureTrack packages at the beginning of the year and allowed farmers to amortize the cost over the subsequent 12 months, it now requires customers to pay the whole amount up front. Given the seasonality in the farm business, SureTrack sales are expected to ramp as the harvest progresses. As at 1Q21, net senior (and total) debt to EBITDA was 2.4x (4.9x). AGI ended 1Q21 with $190 million of undrawn capacity and $49 million of cash.
AGI reported sales and adjusted EBITDA of $256 million and $39.1 million, respectively, versus consensus of $254 million and $30.9 million (see Exhibit 1). Consolidated sales grew 12%. Gross margins of 33.2% expanded 360bp y/y due to mix (i.e. higher Farm sales) and continued realization of operational gains from recent strategic investments. Adjusted EBITDA margin came in at 15.3%, up 410 bp y/y, driven by higher sales in conjunction with fixed cost leverage, and higher gross margins. By segment: Farm sales grew 14% following the strong demand for portable and permanent handling equipment due to the favorable backdrop and as dealers sought to get ahead of price increases. Adjusted EBITDA was $34.1 million (margin of 25%). Technology sales increased 50% on an “as reported basis”. The company continued to trial different go-to-market approaches, namely selling through its dealer network versus direct to customers. To that end, the company engaged third party consultants (at the expense of $1.9 million, which will continue into 2Q), to fine-tune the product offering and sales strategy. Adjusted EBITDA was -$1.4 million. Commercial sales grew 8% with a solid rebound in International and the U.S., following a resumption of more normalized customer behaviour as pandemic-related delays have begun to wane. Canadian Commercial softened as customers took a wait-and-see approach to projects. Adjusted EBITDA was $14.2 million (margin of 12%). The company provided an update to its outlook. Altogether, order intake and backlog remain strong such that management expects robust sales growth through 2021. While EBITDA is expected to be up y/y, management expects higher steel costs and FX headwinds to pressure margins. On the call, management indicated that, after exceeding expectations in 1Q21, that due to higher input costs, they expected a bit of “pressure versus consensus in Q2” (2Q21 EBITDA consensus was $45 million), but expected to come in “at or above consensus” for the full year (2021 EBITDA consensus was $167 million). Specifically, by segment, the outlook was as follows: Farm backlog increased 75% with significant increases in each region as dealers looked to restock ahead of further steel price increases and in anticipation of a busy year as planting intentions. While the company intends to pass-through cost increases to its customers, the lag is expected to pressure margins in 2Q and 3Q (before a normalization in 4Q), more so in the Farm segment than Commercial. Commercial backlog increased 17% with variance across each region. In Canada, the backlog is down 38% as COVID restrictions continue to impact projects in Western Canada. U.S. backlog is up 39%. Management expects sales to continue to improve given the steady flow of maintenance and smaller capital projects, as well as receding trade tensions. International backlog was up 21% with strength in EMEA (+35%), supported by strong quoting activity, and Asia Pacific (+44%), following a favorable monsoon season and increasing rice exports in India (despite COVID challenges). As it relates to the remediation rework, the work is moving ahead and expected to be completed by Fall 2021. As at 1Q21, senior leverage was 2.36x net senior debt to EBITDA (down from 2.53x as at 4Q20). Net debt to EBITDA, excluding provisions, was 4.9x. The company ended the quarter with $190 million of undrawn capacity on its credit facility and $49 million of cash.