Ag Growth International Inc T.AFN

RBC

[retiredcf]

Their upside scenario target is $80.00. GLTA

May 9, 2023

Outperform

TSX: AFN; CAD 55.68

Price Target CAD 70.00

AGI (Ag Growth International)

On pace for another strong year and potential re-rate

Our view: We expect continued sales growth and margin expansion in 2023 as the company executes on its organic growth strategy and operational improvements. We view shares as undervalued, trading at ~7x EV/EBITDA and a 3x discount to large ag equipment peers vs. historical average at 8.5x and 1-2x discount. We believe the combination of strong execution, rising cash generation (~16% FCF yield in 2023) and de-leveraging should support a re-rating back to historical averages and presents upside in shares.

Key points:

Organic sales growth driven by new business expansion and positive underlying ag fundamentals: We believe the ag environment remains favourable with high crop volumes and prices, while management noted continued progress on product transfers across regions and market share gains in key areas such as Brazil. Looking to the remainder of 2023, AGI has a solid order book (+7% y/y), with outsized orders in the Farm segment (+25%) partially offset by lower orders in the Commercial segment (-7%) due to weaker demand in the Food platform sub-segment.

• We forecast Farm segment sales to increase 13% in 2023 and 4% 2024, as this quarter pointed to a rebound in the Canadian Farm segment while US Farm contribution continues to be robust, backed by strong crop production in North America.

• We forecast Commercial segment sales up 12% and 6% in 2023 and 2024 led by International growth through successful product transfers and strong demand in India and Brazil.

  Operational execution and SG&A normalization support margin expansion: Management reiterated their 17% EBITDA margin target in 2023, supported by normalizing SG&A and operational improvements. Elevated SG&A in Q1 was largely related to centralizing corporate functions at the new Chicago facilities, which should normalize in future periods. We expect gross margins to benefit from increased throughput at the company's portable equipment facility, growth in higher-margin India sales, and potential positive mix-shift toward higher-margin Farm sales.

  Strong cash generation to be allocated to de-leveraging, then organic growth: Capital allocation priorities beyond maintenance capex continue to be focused on de-leveraging and high incremental return growth projects, such as expansion plans and operational efficiencies in Brazil. Management also highlighted reduced working capital requirements to support de-leveraging. We view management's goal to reach 3x leverage by end-2023 as very achievable.

  Reiterating Outperform, maintain $70 PT: We raise our 2023E and 2024E EBITDA to $266M and $285M, respectively, from $265M and $278M.