CIBCEQUITY RESEARCH
August 11, 2022 Earnings Update
AG GROWTH INTERNATIONAL INC.
Firing On All Cylinders – Q2/22 Review
Our Conclusion
AFN reported another solid quarter, highlighting strong organic revenue
growth across the U.S., Global (particularly Brazil) and Canada regions, and
strong backlog growth. In line with AFN’s higher F2022 guidance, we expect
the pace of high organic revenue growth to continue in H2/22 and into
F2023. We believe this growth is sustainable for the foreseeable future as
the build-out of global grain and food infrastructure is still in its early stages.
We are raising our F2022 and F2023 estimates, increasing our price target
from $51 to $52 and maintaining our Outperformer rating.
Key Points
Backlog Levels Remain Healthy; Positive Outlook For Both Farm &
Commercial In H2/22: Backlog is up +19% Y/Y. Farm backlog is up +15%
Y/Y, and AFN expects strong H1/22 Farm results to continue into H2/22.
While the majority of the farm backlog strength is coming from the U.S., the
Canadian Farm segment should rebound in H2/22 as dealers begin to move
inventory. Farm results from International regions in H2/22 should also be
strong as quoting pipelines remain robust. The Commercial segment is also
seeing strong demand with backlogs up +22% Y/Y.
Margin Tailwind To Continue Into H2/22: Q2/22 adj. EBITDA margins were
~160bps higher Y/Y, reflecting an easier comparable period, easing steel
prices and the benefit of operating leverage. Recall that Q2/21 and Q3/21
margins were significantly impacted by the sharp rise in steel prices last year.
Inflation is less of a concern now for AFN, given that steel (biggest cost
component) prices are well below H2/21 peak levels.
Brazil/U.S. Continue To Shine: Brazil Q2/22 revenue was up ~80% Y/Y and
backlog is up ~91% Y/Y. Recently, AFN completed the transfer of fertilizer
production equipment from the U.S. to Brazil, and the expanding product
catalog should continue to support continued gains in market share. AFN is
looking at debottlenecking opportunities to expand production to support
years of growth ahead. The U.S. strategy to deepen penetration of farm
system dealers is working as U.S. sales were up ~30% Y/Y in Q2/22, with
backlog up a respectable +19% Y/Y.
Continued Objective To De-lever Balance Sheet: AFN’s senior debt
leverage (excluding convertible debt) stands at 2.7x, down slightly from 2.9x
Q/Q and 2.8x Y/Y (covenant 3.75x). YTD cash flows have been constrained
by higher non-cash working capital levels ($124MM outflow YTD), mostly due
to running higher inventory levels to manage supply chain issues. AFN
expects inventory intensity will moderate in H2/22, and most of $124MM YTD
outflow to be recovered in H2/22. Overall leverage (net debt/EBITDA) could
reduce to 3.5x-4.0x going into 2023 vs. 4.8x as at Q2/22 end