CIBCHave a $72.00 target. GLTA
EQUITY RESEARCH
May 9, 2023 Earnings Update
AG GROWTH INTERNATIONAL INC.
Robust Fundamentals Drive Guidance Raise
Our Conclusion
In its seasonally slower quarter, AFN reported a slight Q1/23 miss, but raised
2023 guidance. Fundamentally strong agriculture markets should continue to
support solid organic revenue growth, and management remains confident in
achieving its 17% adj. EBITDA margin target for FY2023, despite the margin
miss in Q1/23. AFN continues to make progress on improving its leverage
targets (Q1/23 net debt/EBITDA at 3.6x vs. 5.4x Y/Y). Post AFN’s Q1/23
results and slight F2023 adj. EBITDA guidance raise, our FY2023 adj.
EBITDA estimate ($265MM) remains largely unchanged, while our FY2024
estimate ($293MM) is increased slightly. We reaffirm our $72 price target and
Outperformer rating. There remains a very strong valuation argument, with
AFN trading at <7x EV/EBITDA (2024E) vs. its ag. equipment peers at >10x.
Key Points
Still Confident In 17% Adj. EBITDA Target For FY2023: AFN continues
to guide to 17% EBITDA margins in 2023 for three reasons. 1) Ramp in
Brazil farm business (higher margin) should offset the current higher mix of
lower-margin commercial sales and buy-resell third-party components in
Brazil. 2) Other / Corporate EBITDA loss was ~$5MM higher Y/Y in Q1/23,
due to higher SG&A (operational excellence / centralization efforts along
with one-off legal / insurance costs). Recent digital restructuring and food
platform unification efforts should now lead to SG&A gradually declining
ahead. 3) Higher throughput (operating leverage) of U.S. portable equipment
should offset the impact of more U.S. permanent demand in H2/23.
Order Book Remains Healthy; FY2023 Guidance Raised: AFN indicates
that quoting pipelines are highly active and it is raising its FY2023 adj.
EBITDA guidance to be at least $265MM, up from prior guidance of at least
$260MM. Backlog as at Q1/23-end is up 7% Y/Y. Farm backlog is up 25%
Y/Y, and this does not completely reflect management expectations for Brazil
Farm and U.S. permanent demand to improve over the balance of the year.
Commercial backlog is down 7% Y/Y, primarily due to weaker Food and
EMEA region demand. AFN expects Food backlog to improve in H2/23, and
growth in India (which falls under Commercial) and Brazil Commercial should
help Commercial backlog recover.
Leverage Ratios Continue To Trend Lower: AFN’s net debt / TTM EBITDA
ratio declined to ~3.6x at Q1/23 vs. ~3.7x at 2022-end and ~5.4x a year ago,
driven by continued growth in adj. EBITDA and improved working capital
management. Management noted it is on track to get this ratio down to the
3x level by 2023-end and 2.5x by 2024.