CIBC Ag Growth International (Outperformer; C$82 Price Target)
Our Conclusion: We continue to expect Q2/24 to be relatively weaker on a Y/Y basis (in line
with company messaging reflecting some softness in U.S. Farm and the timing of the
Commercial order book). However, H2/24 should show strong Y/Y revenue and earnings
growth, with management recently noting that it remains very confident that the solid
international Commercial order book will deliver in the back half of the year. Further, there
could be upside in H2/24 if we see U.S. Farm recovering with strong crop yields/higher
production. AFN trades at <6.0x 2025E EV/EBITDA (see left-side Exhibit 4 line chart) vs. its
ag. equipment peers at ~9x. Given the recent takeover offer (that was turned down by AFN),
share price downside should be limited. We reaffirm our Outperformer rating and C$82 price
target.
Q2/24 Preview: We forecast Q2/24 adj. EBITDA of C$83MM (vs. consensus C$82MM), ~6%
lower Y/Y (refer to the table in Exhibit 42). We forecast the top-line to be down ~2% Y/Y
reflecting continued weakness in the Farm business (U.S., Brazil and Australia). Canada
Farm should remain healthy. We are forecasting slight EBITDA margin contraction on a Y/Y
basis to reflect due to mix. The focus for Q2/24 results will be on 2024 guidance (adj. EBITDA of >C$310MM) and whether management still expects a solid contribution from Commercial in H2/24, order book levels (+12% Y/Y at Q1/24-end), and updates on the India expansion and product transfer strategy.
1. Continue To Expect Solid Commercial Segment Results In H2/24: AFN continues to
expect project deliveries to pick up in H2/24 from several large-scale projects ($20MM-
$60MM range per project) currently underway (manufacturing ongoing), most notably in
APAC, Europe, the Middle East and Africa. Note, AFN’s near-record consolidated order
book (+12% Y/Y) has a heavy tilt towards the Commercial business, which provides good
visibility till the end of the year. Further, management noted that it has seen no project
timing changes vs. its expectations during Q1/24 earnings results at the end of April.
Overall, we believe this should support double-digit Y/Y revenue growth in H2/24, after
negative growth in H1/24.
2. Farm Weakness Likely To Continue In Q2/24, But Encouraging Signs Of Potential
Recovery Emerging: We expect AFN’s Farm business to post a weak Q2/24. That said,
U.S. farmer sentiment is starting to improve slightly, given expectations for better weather
/ harvest. The USDA currently forecasts the corn crop to be 14.9B bu. in 2024 (3% lower
vs. 2023, but 9% higher vs. 2022). Should sentiment continue to improve, AFN should
initially see an improvement in the performant storage side of the business (very little
inventory at the dealership level). Further, management noted that it has starting to see
some improvement in Brazil Farm in June (though still early days). Unlike other key
regions, Canada Farm should do well, with management noting that the order book
remains healthy.
3. Margins Gains Should Hold In 2024: While project mix will be a headwind in 2024 (i.e.,
higher mix of commercial and less portable Farm sales), AFN expects 2024 to benefit
from a full year of operational excellence programs started in 2023, along with new initiatives. We forecast an adj. EBITDA margin of 19.1% in 2024, in line with the 19.3%
recorded in 2023 (significantly above the 16.1% in 2022).
4. Balance Sheet In Strong Position / Organic Expansion Opportunity In India: AFN’s
net debt / TTM EBITDA ratio was 2.9x at Q1/24 (down from 3.6x a year ago).
Management is confident in the leverage ratio getting to 2.5x or lower, most likely in
H2/24. The inventory investment to deliver on the solid Commercial order book should
normalize in H2/24. From an organic expansion investment perspective, India (about
10% of AFN’s consolidated sales today) will be the focus. Indian operations have doubled
since 2019 (company-leading margin profile), and AFN has already acquired land for
future expansion (3-4 year investment plan).