Our view: We remain constructive on AGI as we see continued execution on both organic growth initiatives and margin expansion efforts while a coming capital allocation pivot to growth investment will support efforts to reach the company's $2B sales target. We also view AGI shares as undervalued at ~6.5x 2024E EV/EBITDA, below the historical average of 8x and at a 2x discount to peers at 8.5x (vs. historical 1.5x discount) (Exhibit 1), and see potential for re-rating with continued growth and improving cash generation.
Key points:
Top-line growth in 2024 supported by record order book and further execution on organic growth priorities: Revenue was up ~5% in 2023 while management guidance implies ~$1.6B revenue in 2024 (7% y/y) supported by a $747M (25% y/y) order book to start the year and continued organic growth, through a combination of product transfers, International growth, and recovery in Digital/Food platforms. In Farm, we forecast sales to increase 6% in 2024 led by solid demand for both portable/permanent equipment in Canada supported by continued International growth. In Commercial, we forecast sales up 12% in 2024, with growing International sales (particularly in MENA and Asia-Pacific) reflected in a strong order book; however, results are back-half weighted due to project timing. We could see upside to growth if ongoing restructuring in Digital/Food subsegments is successful and the new Feed platform gains traction.
Margins expected to remain structurally elevated, offsetting product mix headwinds: EBITDA margins expanded in 2023 to 19%, from 16% in 2022 and well above the 14-15% between 2018-2021. Into 2024, we expect AGI to continue implementing operational and manufacturing efficiencies that structurally lift margins, but this will likely be offset by a product mix shift normalization leading to greater contributions from lower-margin commercial sales in 2024. Long term, we are confident AGI can sustain EBITDA margins at 19% with potential upside as management has proven effective at continuously improving operations.
Significant FCF generation to target deleveraging before pivoting to growth: We expect the combination of sales growth and structurally higher margins to drive improving free cash flow generation. We forecast $99M and $117M in 2024/2025 (8%/9% FCF yield). As AGI nears targeted leverage of 2.5x net debt/EBITDA (currently 2.8x LTM), management has signalled a likely shift toward investment spend with an initial focus on opportunities in India and the US.
Reiterate Outperform, raise PT to $80: We raise our 2024E/2025E EBITDA to $311M/$327M, respectively, from $307M/$316M.