AG GROWTH INTERNATIONAL INC.
Operational Excellence Kicks In – Q2/23 Review
Our Conclusion
AFN reported a solid quarter (beat stemmed from better margins on the back
of its operational excellence programs) and raised 2023 guidance. Drought
concerns going into Q2/23 turned out to be overblown as the company’s
diversification strategy is paying off (reducing Q/Q seasonality and overall
earnings variability as weakness in one region is offset by strength in others).
As AFN continues to implement its operational excellence programs and
organic growth initiatives, reduce debt, and close out bin collapse incident
payments, we expect it to near its historical multiple (~9x EV/EBITDA).
Arguably, AFN could trade at higher than 9x given its unique platform in the
agriculture industry that would be difficult to replicate. We raise our 2023 and
2024 estimates (primarily on higher margins), increase our price target from
$72 to $78 (applying an 8x target EV/EBITDA multiple), and maintain our
Outperformer rating. AFN remains our top pick in the sector.
Key Points
Operational Excellence Margin Enhancement Sustainable; Further
Room To Improve Cost Structure: AFN’s Q2/23 adjusted EBITDA margin
of 22.6% was ~550 bps higher Y/Y and raised its 2023 adjusted EBITDA
margin target to at least 18% (17% previously). AFN notes that ~200 bps of
improvement came from operational excellence programs (manufacturing
efficiency, centralized procurement, workforce optimization, etc.), which is
seen as structural/sustainable. Additional margin expansion came from
pricing and lower Y/Y steel prices. AFN notes it is just getting started on
operational improvements and sees further opportunities to improve its cost
structure, suggesting further structural margin expansion beyond 2023.
Revenue Growth Slowdown Temporary; Expects H2/23 Y/Y Revenue
Growth To Be Stronger Than H1/23: After accounting for flat Y/Y revenue
growth in Q2/23, H1/23 revenue growth was ~8% Y/Y. AFN notes that it
expects growth in H2/23 to be better than that in H1/23, propelled by the
international segment. While Brazil Farm was soft in H1/23 (Brazil
Commercial was very strong in Q2/23), its order intake and order book
increased substantially Q/Q in Q2/23. Falling interest rates along with record
forecast crops are improving sentiment in the country. AFN still expects to
reach $2B in overall revenue over the “next few years.”
Canada And U.S. Farm Business Quite Healthy, Despite Dry Weather
Concerns: The Canada farm order book is exceptionally strong, up 77%
Y/Y, while the U.S. farm order book remains healthy, up 3% Y/Y. In Canada,
despite dry conditions that developed in late Q2/23, AFN expects the
momentum in H1/23 to carry through to H2/23, particularly Q3/23. In the
U.S., though customers are cautious on permanent equipment, AFN expects
normalized levels in H2/23, and remains positive on demand for portable
equipment.