More Raised Targets By “sharpening its operational focus,” Ag Growth International Inc. can generate “value-accretive growth,” according to National Bank Financial analyst Maxim Sytchev.
In a research report titled Time to harvest prior investment cycle, he assumed coverage of the Winnipeg-based company following Thursday’s Investor Day event, concluding its “seemingly straightforward and ‘simple’ operational algorithm should yield better returns for shareholders.”
“AFN has multiple macro tailwinds (population growth, changing diets, increased exposure to rapidly growing emerging markets, European rebuild opportunity, etc.),” said Mr. Sytchev. “For the stock to work, what’s needed is a laser focus on execution in its core business lines, in order to break out from the material underperformance pattern vs. similarly exposed comp cohort (we cannot call AGCO or Deere peers, Kepler Weber more so – AFN stock is down 12 per cent over five years vs. respective returns of 103 per cent/154 per cent/518 per cent).
“The value-destructive digital pivot needs to be curtailed, enabling supporting technology implementation for existing products only vs. competing head-on against IoT [Internet of Things] specialists or much larger entities in the space. We believe the new CEO (Paul Householder – appointed in Sept. 2022) provides a perfect junction to turn the page and optimize the previously amassed assets via centralized supply chain procurement, tighter working capital management, benchmarking and overall capacity optimization (does that sound familiar to what we have seen from ATS since 2017? – that approach has worked very well for investors). We believe key messages from the Investor Day provide the blueprint for achieving compounding.”
The analyst pointed to four highlights from the event: a potential path to a top line of $3-billion (from $1.5-billion currently) through “product transfers to international markets, organic investments + macro”; margin growth opportunity to beyond a 17-per-cent-plus EBITDA level (from an estimated 16.2 per cent in 2022; Operating leverage; and “FCF generation directed towards debt repayment (no M&A).”
“How can we be certain that the above suggestions are going to be implemented?,” said Mr. Sytchev. “The introduction of an ROIC component into the compensation of management effective in 2020 should provide better alignment while being over the CapEx/M&A hump should mathematically lift returns. Internal cash flows can therefore be redeployed towards simultaneously strengthening the balance sheet and accruing value for equity holders by lessening the financial risk. This self-help chapter of AFN should be less exciting and therefore more value generative.”
Introducing his forecast for 2024, the analyst is projecting mid-single-digit organic growth in both 2023 and 2024 “as well as some margin improvement given the focus on improving profitability and reducing the EBITDA drag of the now restructured ‘Digital’ segment.
He maintained the firm’s target of $62 per share. The current average on the Street is $57.64.
Elsewhere, others making changes include:
* Raymond James’ Steve Hansen to $64 from $55 with an “outperform” rating.
“Yesterday’s Investor Day ... broadly reinforced our constructive macro outlook and, more importantly, outlined clear strategic priorities focused on: 1) sustained organic growth (no M&A!); 2) platform optimization & incremental margin improvement; and 3) deleveraging the balance sheet. Having recently surpassed $1.0-billion in sales ($1.4-billion TTM), new CEO Paul Householder notably identified $2.0-billion as the next key goal/milestone (no timeframe) & even called out $3.0-plus-billion as being on the longer-term roadmap. As indicated herein, we admire this plan and believe that consistent/successful execution will facilitate healthy multiple expansion over time,” said Mr. Hansen.
* iA Capital Markets’ Matthew Weekes raised his target to $57 from $54 with a “speculative buy” rating.
“Based on commentary from AFN’s investor day, we are increasing our 2023 and 2024 Adj. EBITDA by 3.7 per cent and 4.4 per cent, respectively, bringing us more in line with consensus,” he said. As a result, we are raising our target price ... which is based on a combination of an 8.0 times EV/EBITDA multiple, an 8.0 times P/AFFO multiple, and a DCF analysis while continuing to build in provisions for litigation risk. We reiterate our Speculative Buy rating, underpinned by AFN’s (a) diversified ag-equipment business serving both Farm and Commercial customers, with exposure to both fast-growing and mature agricultural markets; (b) track record of strong growth in per share metrics; (c) constructive near-term outlook with projected high-single-digit Adj. EBITDA CAGR from 2022-2024; and (d) positive secular trends underpinning equipment in agri-food equipment and infrastructure; tempered by (e) litigation risk.”