Scotia Capital Scotia Capital analyst Michael Doumet sees a “large disconnect” between the trading multiple for Ag Growth International Inc. (AFN-T) and his expectations for 2024 and beyond.
“The market is valuing AFN like a cyclical on the cusp of a profit pullback; instead, we view AFN as a secular growth story that combines multi-year tailwinds in international markets and unique growth opportunities (i.e., market share expansion and ability to leverage customer relationships globally),” he said. “As such, while several ag equipment peers are talking down 2024 sales/volumes expectations, we expect AFN to expand EBITDA in 2024 (can achieve 5-per-cent to 15-per-cent EBITDA growth per year, in our view) despite doubling EBITDA since 2019. As the sustainability of its profit growth becomes apparent, we expect a meaningful re-rate, from a 15-year low (approximately 6 times EV/EBITDA) to something more reflective of its growth prospects. Multiple expansion should be further aided by its FCF yield (10 per cent) and its further balance sheet deleveraging.”
In a note released Wednesday, Mr. Doumet suggests the Winnipeg-based company is better positioned to endure changes in the industry than its peers.
“In the last three years, farmer incomes benefited from higher crop prices. But it’s widely believed that the pullback in crop prices and expected moderating farmer incomes will result in a normalization of capital goods volumes in 2024,” he said. “DE-US’s [Deere’s] 2024 guidance highlighted (if not strengthened) such expectations — and that “normalization” sentiment has weighed on AFN’s trading multiple (in addition to the fact that AFN has doubled EBITDA since 2019, we believe largely due to its under-earning in 2019 due to a lack of operational performance and consolidation post-M&A). AFN does not share the same macro drivers as its ag equipment peers (i.e., it is more skewed to crop production, weather, and crop trade flows), and we believe that, as a small cap, it will be successful with its needle-moving organic initiatives. Therefore, while ag equipment sales are largely expected to moderate in 2024, we believe AFN may generate EBITDA growth in 5 per cent to 10 per cent in 2024. Its ability to buck the trend in 2024, in our view, will demonstrate the sustainability (and secular nature) of its recent EBITDA growth, which should drive a re-rate in the shares.”
Also touting its “growth story,” including opportunities in Brazil and India, he raised his target for its shares by $1 to $83, keeping a “sector outperform” recommendation. The average is currently $76.56.