Multiple Raised Targets National Bank Financial analyst Maxim Sytchev thinks the 5.6-per-cent drop in share price sustained by Ag Growth International Inc. following the premarket Tuesday release of “an ok” quarterly release “is actually fair” given the 36-per-cent gain year-to-date.
“At the same time, the longer-term thesis is unchanged as previously questionable capital allocation strategy is now fully channeled into de-leveraging which accrues directly to equity holders, without much risk,” he said. “Assuming the company hits the 17-per-cent EBITDA margin target in 2023, when combined with working capital optimization, our confidence in getting the balance sheet to 3 times net debt to EBITDA remains high.”
The Winnipeg-based company reported revenue of $347-million, up 19 per cent year-over-year and above both Mr. Sytchev’s $312.3-million estimate and the consensus forecast of $326.3-million driven by “robust” growth in Canada from “strong commodity prices and the expectation of high crop production for the 2023 season, which are helping maintain higher overall demand.” Adjusted earnings per share of 25 cents missed expectations (64 cents and 39 cents, respectively) due largely to an $8-million overestimation of forecasted adjusted earnings for the first quarter.
Despite the “messy” EPS result, Mr. Sytchev emphasized “ongoing operational optimization and deleveraging support our ‘simple’ investment thesis.”
“Structural improvements are in progress, despite transient costs in the quarter,” he said. “Corporate costs were elevated in the quarter as AFN continued streamlining legacy Digital operations (expected to be EBITDA positive in 2024), integrating the prior Food vertical into Commercial operations and completing various organizational streamlining initiatives (centralizing materials purchasing consolidating production facilities, etc.). SG&A as a percentage of revenues are also expected to moderate through the remainder of the year. End-market demand remains strong, especially in Canada, India and Brazil (softer farmer sentiment in Q1 is improving). In the latter market, the company optimized its production space to improve capacity and productivity which, combined with an expected record crop in 2023 and structural shortage of on-farm storage capacity, underlines the market’s long-term potential. Management is also confident in gaining market share in India.
“17-per-cent EBITDA margins are in sight for 2023. The above factors, combined with solid progress on product transfers across geographies and a rebuild of the order book in EMEA and the Food segment, suggest that a 17-per-cent margin is a realistic possibility for 2023 (we were modeling 16.7 per cent pre-quarter). Recall that Q2 and Q3 have seasonally higher revenues, so operating leverage will be a major factor in lifting margins from the 13.9 per cent seen this quarter.”
Maintaining an “outperform” recommendation for Ag Growth shares, Mr. Sytchev raised his target to $69 from $67 based on " better-than-expected EBITDA directionality.” The average is $72.20.
Other changes include:
* ATB Capital Markets’ Tim Monachello to $70 from $69 with an “outperform” rating.
“Overall, we continue to believe AFN is well positioned to outperform with a diverse set of low capital intensity brownfield growth opportunities across geographies and business lines as AFN deepens its penetration in existing markets, complemented by an improving cost structure as it reaps the benefits from ongoing restructuring and optimization initiatives over the medium term,” said Mr. Monachello. “In 2023, we believe margin improvement and deleveraging will be primary catalysts for stock appreciation. All told, we view the recent pull back as an opportunity for investors to build or add to positions in AFN.”
* Desjardins Securities’ Gary Ho raised his target to $75 from $74 with a “buy” rating.
“The decline in AFN’s share price [of 5.6 per cent] is unwarranted, in our view,” said Mr. Ho. “While 1Q EBITDA missed consensus (but met our forecast) and margins were weak due to one-time items/seasonality, AFN raised EBITDA guidance by 2 per cent, which shows management’s conviction in its outlook. We remain bullish on the story and margin improvement potential. Despite the weakness [Tuesday], we view it as an attractive buying opportunity.”