Q3/24 preview: Looking for improvement in Q3 but likely more Q4 weighted
Our view: We temper our expectations for Q3 results as we see downside risk to US Farm estimates on a weakening ag backdrop paired with commercial order timing that could be more Q4-weighted. However, we remain constructive on the long-term fundamentals for AGI based on structurally stronger margins, upside in international growth, and the favourable risk/reward valuation skew in shares (6x NTM EBITDA vs. 7x implied takeout offer and 8x historical average). We maintain our Outperform rating and $80 PT.
Key points:
Estimated Q3 results sequentially stronger, but Farm headwinds and Commercial order timing could put more weight on Q4: We forecast revenue of $416M in Q4 (+1% y/y, +18% q/q; -5% vs. consensus) as we think US Farm could create a drag on results. We model $86M EBITDA in Q3 (+2% y/y, +26% q/q; -3% vs. consensus) with our weaker top line forecast offset by expectations of solid margin performance. We lower our full- year estimates to $1.6B revenue and $300M EBITDA (vs. $1.6B and $301M previously) at the low end of the $300-$310M EBITDA guide. This would imply a record Q4 which is typically seasonally weaker, but management has conveyed strong visibility in Q4 delivery supported by commercial order timing.
Commercial sales driving growth while US Farm recovery more likely in H2/25: While crop volumes are the key driver for AGI Farm segment sales over time, we could see equipment purchase deferrals and an extended replacement cycle due to pressured farmer economics as crop prices remain soft. Management indicated during Q2 results they were seeing greenshoots of improvement in US Farm due to expectations for strong crop yields and production, but we think continued low crop prices could push the recovery out to 2025. We think there is potential upside to our conservative 2025 estimates depending on pent-up demand into next year, but the recovery may be more weighted toward H2 as dealers work through inventory. On the flip side, Commercial sales commentary has been very positive, and we forecast +8% y/y growth in sales. We expect continued momentum in Commercial to continue into 2025, supported by continued product transfers and investment in ag infrastructure.
Capital allocation focused on deleveraging and then growth: We forecast $42M/$127M of FCF in 2024/2025 (4%/12% yield) based on solid growth and continued margin performance. With balance sheet deleveraging nearly at the target net debt to LTM EBITDA level of 2.5x (we estimate by EOY), we could see a shift to a more significant shift to growth investments in 2025. We will be watching for incremental commentary on upcoming investments with our expectation being a focus on key emerging growth regions of India and Brazil as well as facility consolidation in North America to improve operational efficiency.