AGI (Ag Growth International)
Q2/23 results above expectations and guidance raised on stronger margins
TSX: AFN | CAD 52.58 | Outperform | Price Target CAD 70.00
Sentiment: Positive
Our view: We expect a positive reaction from Ag Growth shares to Q2 results that were ahead of estimates and upward guidance revisions. We are encouraged by the lift in EBITDA margin guidance to 18% (from 17%), indicating that operational excellence initiatives are progressing well. We continue to see an opportunity for a re-rating of shares as the company successfully executes on margin improvement, organic sales growth, and de-leveraging priorities.
Actual: $88M EBITDA | RBCe: $72M | Consensus: $75M
Outlook: Ag Growth raised 2023 EBITDA guidance to >$290M from >$265M (vs. RBCe $264M, consensus $268M, and $235M in 2022) and EBITDA margin guidance to >18% from 17%. The increased EBITDA outlook is supported by successful execution on operational improvement priorities that have expanded margins while backlogs in the higher-margin Farm segment remain elevated (+27% y/y). On the balance sheet front, Ag Growth has made solid progress on de-leveraging, with net debt to EBITDA reaching ~3.2x by end-Q2/23 and on track to end 2023 at ~3.0x as guided.
Summary: Q2/23 results exceeded expectations, as lower sales ($390M actual vs. RBCe $405M) were more than offset by stronger EBITDA margins (22.6% actual vs. RBCe 17.9% and 16.9% in Q2/22). In the Farm segment, sales were in line with expectations ($233M actual vs. RBCe $235M) while segment EBITDA significantly outperformed ($70M vs. RBCe $50M), driven by manufacturing efficiency, favourable mix shift toward higher-margin portable equipment sales, and progress made in the recently reorganized Digital segment. The Farm segment order book continues to grow, with the backlog up 27% y/y, although AGI noted that some customers delayed order commitments late in Q2 due to limited visibility into farming conditions in the U.S. In the Commercial segment, sales were below estimates ($157M actual vs. RBCe $171M), while segment EBITDA was in line ($29M actual vs. RBCe $30M). Sales lagged due to weakness in North America, partially offset by continued strong demand internationally, but margins benefited from stronger manufacturing expense management. The Commercial order book pulled back -10% y/y, with weakness in the food platform and fertilizer markets weighing on demand.