Ag Growth International Inc T.AFN.DB.J

Primary Symbol: T.AFN Alternate Symbol(s): AGGZF | T.AFN.DB.H | T.AFN.DB.G | T.AFN.DB.I

Industrials

Ag Growth International Inc. is a provider of the equipment and solutions required to support the storage, transport, and processing of food globally. The Company provides equipment solutions for agriculture bulk commodities, including seed, fertilizer, grain, rice, feed, and food processing systems. It has manufacturing facilities in Canada, the United States, Brazil, Italy, France, and India and distributes its products globally. Its segments include Farm and commercial. Its Farm segment focuses on the needs of on-farm customers, and its product offerings include grain, seed, and fertilizer handling equipment; aeration products; grain and fuel storage solutions, and grain management technologies. Its Commercial segment focuses on commercial entities, such as port facility operators, food processors and elevators. Its product offerings include larger diameter grain storage bins and high-capacity grain handling equipment; food and feed handling storage and processing equipment.

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Ag Growth International Inc

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Post by SunsetGrillon Aug 14, 2023 9:35am

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Post# 35586760

SCOTIA ups to $82 post c.call

Reaping the Rewards

OUR TAKE: Positive. 2Q beat – all from higher margins. AFN sales grew ~50% in 2021 and 2022 (combined) on an organic basis. And, while we remain optimistic on its growth prospects, the 2Q beat highlights the more meaningful upside potential from (ongoing) margin expansion. Margin expansion has come more quickly than anticipated and, given the underlying momentum, likely has more room to go. The margin expansion goes to the essence of our bull thesis: higher margins and rightsized capital outlays (capex/WC) will drive a significant increase in FCF generation and an acceleration of the B/S deleveraging. Higher returns and lower debt should lead to multiple expansion.

We see material upside in the shares: (i) AFN shares are up ~85% in the LTM, but its multiple remains at the lowest level in the decade and (ii) at current levels, AFN shares are below their 2019 level, despite the company nearly doubling its EBITDA (and having the same net debt). With positive momentum in terms of growth opportunities, margin upside, and FCF, we believe AFN shares, which trade at ~7x EV/EBITDA on our 2023E, are undervalued.

KEY POINTS

2Q EBITDA beat consensus by 17% as EBITDA margins expanded to 22.6% (+570bp). On the back of the strong margin performance, the company raised its 2023 EBITDA margin guidance to “at least 18%” from 17%. Pricing, manufacturing efficiencies, input cost, and supplier management initiatives enacted in the LTM drove the margin expansion. On the call (and as we expected), management discussed the ability/willingness to toggle between revenue growth and margins (i.e., price vs. volume) going forward and alluded to additional operational improvements that should lead to further margin expansion – saying that they would like to operate “in that 18% to 19% range”.

AFN raised its 2023 EBITDA guidance to >$290 million from >$265 million as it is operating ahead of plan, seeing ‘more success’ in its manufacturing efficiencies, and is more confident in its 2H outlook. For margins, the company expects ‘similar’ margins in 3Q vs. 2Q and for lower margins in 4Q (relative to 2Q and 3Q), but potentially less sequential margin softness vs. 3Q (vs. what is typical) as strength in Brazil and India should smooth out seasonality. Management expects stronger consolidated sales growth in the 2H than in the 1H (>8%). Given the anticipated pace of revenue growth and presumed margin expansion in the 2H, we see upside to AFN’s 2023 EBITDA guidance.

AFN guided to net debt of ~3x exiting 2023, from 3.3x in 2Q (inclusive of a $55 million cash outflow in 3Q related to the settled bin incident). With fewer ‘one-time’ costs going forward, we expect AFN to settle out with net debt of about 2.5x and FCF/share of ~$5.50 in 2024.

Qtly Adj EBITDA (M)	Q1	Q2	Q3	Q4	Year	EV/Adj. EBITDA
2021A	$39	$46	$46	$45	$176	8.3x
2022A	$41	$66	$76	$51	$235	7.4x
2023E	$48A	$88A	$88	$68	$292	6.4x
2024E	$52	$81	$91	$71	$295	6.0x

2Q sales/EBITDA of $390 million/$88.2 million came in ahead of consensus of $429 million/$75.1 million. On a consolidated basis, sales were flat while EBITDA grew 33% y/y. EBITDA margins expanded 570bp to 22.6%, well above AFN’s previous target of 17% (for 2023). By region, sales increased 2% and 7% in Canada and International, partially offset by 5% lower sales in the U.S. The order book grew 3%, with Farm (+27%) and commercial (-10%). AGI digital business competed a significant phase of restructuring, leadership team is now fully in place and posted positive adj. EBITDA for the first time in 2Q.

Farm sales/EBITDA increased 3%/37%. Growth was driven by strong volume for portable grain handling products and pricing strategies. Farm EBITDA margins of 30% increased 740bp driven primarily by operational excellence initiatives targeted at manufacturing efficiency, a favourable mix of portable equipment, and progress made in the digital reorganization. Farm segment order book is up 27% y/y. Canada Farm, in 1H23 was the key growth region. For 2H, Canada Farm maintains a positive outlook with an order book up 77% y/y. U.S. Farm margins improved in 2Q due to product mix, SG&A discipline, and manufacturing efficiencies. The U.S. order book increased 3% y/y and the dry conditions have somewhat subsided in Q3. In Brazil, improvement in market conditions and expectations for a record crop have led to improved farmer sentiment. As a result, Brazil’s order book, inclusive of commercial, recorded a 160% increase from 1Q, now skewed towards Farm. Management is looking for a strong 3Q performance for Brazil. Management further noted that demand was solid in EMEA and that portable grain handling products are growing in popularity in Asia-Pacific.

Exhibit 1 - 2Q Beats on Higher Margins

Source: Company reports; FactSet; Scotiabank GBM estimates.

Commercial sales decreased 4% while EBITDA increased 22%. Sales were negatively impacted by reduced demand in the food platform and the cyclical nature of large commercial projects in North America. EBITDA margins of 18.5% expanded 390bp due to efficient cost management. In North America, commercial sales were down 19% due to a decline in the food platform and softness in fertilizer market. The commercial order book declined in Canada and the U.S., but recently showed signs of improvement. In Asia Pacific, sales were down 5%, coming from the broader APAC region, partly offset with growth in India (+17%). In India (a leading margin contributor in the global mix), demand for rice milling products remain solid and the order book rose 10%, which supports a favorable 2H outlook. In South America, sales grew 64%. The order book in South America declined 14%, primarily due to timing, but the management noted the outlook remains ‘encouraging’. In EMEA, sales were down 10%, largely due to timing; gross margin expansion and SG&A control enabled the region to increased EBITDA contribution. EMEA order book is up y/y.

On the back of the strong 2Q and underlying improvements, AFN raised its 2023 EBITDA guidance to “at least $290 million” from “at least $265 million” and raised its EBITDA margin guidance to “at least 18%” from 17%.

Net debt to EBITDA as per the company’s calculation was 3.3x as at the end of 2Q (vs. 3.6x as at 1Q). On July 27, the company announced the resolution of the lawsuit by Fibreco related to the commercial grain storage bin failure. As per the release, AFN recorded a $15.6 million pre-tax charge in 2Q23.

Valuation: 8.5x EV/EBITDA on our 2024E
Rating	Sector Outperform
1-Yr. Target	C$82.00
AFN-T	C$52.58
1-Yr. Return	57.1%
Div. (NTM)	C$0.60
Div. (Curr.)	C$0.60
Yield (Curr.)	1.1%
ESG Score	NA