AG GROWTH INTERNATIONAL INC.
Operational Excellence Impact Continues - Q3/23 Review
Our Conclusion
AFN reported another good quarter, delivering on its strategic goals of
expanding margins, lowering leverage and growing organically. Margins
were particularly impressive (~160 bps higher Y/Y), and though revenue
growth was 2% higher Y/Y, it would have been closer to 5%-7% higher Y/Y
on an apples-to-apples basis (i.e., normalizing for the impact on product
pricing from lower steel prices). The case for global grain infrastructure
remains compelling. We expect a strong Q4/23 and 2024 driven by the
continuation of strong margins (on the back of recent operational excellence
programs) and international organic growth (Brazil, India, EMEA). At just
over 6x 2024E EV/EBITDA, AFN is trading at levels not seen since the Great
Financial Crisis. We reaffirm our $78 price target and Outperformer rating.
Key Points
Order Book Still Elevated And Expected To Improve Sequentially: The
consolidated Q3/23 order book was up 3% Y/Y, with growth in Canada,
EMEA and India offset by declines in Brazil and the U.S. While the South
America order book is down 21% Y/Y, this is largely a timing issue due to the
completion of two large Brazil commercial projects. The commercial project
pipeline in Brazil is solid, and farmer sentiment has improved with recent
government initiatives. The U.S. order book is down 11% Y/Y, but the recent
move higher in steel prices is serving as a catalyst for the U.S. order book
(i.e., farm demand improving before product prices move higher).
Operational Excellence Margin Benefits To Carry Into 2024: AFN’s Q3/23
adj. EBITDA margin was ~100bps ahead of consensus due to the positive
impact of various operational excellence initiatives. While some of the margin
improvement this year has been attributable to mix (i.e., more higher-margin
portable farm sales), AFN is confident that the operational excellence
program benefits will more than offset the impact of an expected recovery in
permanent farm and commercial (relatively lower-margin) in 2024.
Revenue Growth Likely To Accelerate Moving Forward: While Y/Y
revenue growth was 2% in Q3/23 (and flat in Q2/23), this can largely be
attributed to the impact of normalized product pricing given that steel prices
were down an average of ~20% vs. a year ago. Normalizing this impact,
revenue growth would have been 3%-5% higher than reported figures.
Underlying volume growth in the business is very positive and we believe
revenue growth should improve, driven by the international segment.
Leverage Ratio Comfortably Tracking To 3x Target By Year-end: AFN’s
net debt / TTM EBITDA ratio notched down to 3.2x at Q3/23 vs. 3.3x a
quarter ago and 4.1x a year ago, despite the previously announced bin
collapse settlement amount (net of insurance proceeds) paid in Q3/23. As
AFN gets closer to its 2.5x target towards the middle of next year,
management will look to invest more into organic growth expansion.