November 10, 2022
AGI (Ag Growth International)
Strong execution augmented by positive ag environment
Our view: We believe Ag Growth has set the stage for a potential re- rating opportunity through the combination of strong organic growth, margin improvements, and a balance sheet that is being de-levered. Ag fundamentals continue to be favourable both near-term due to high crop volumes and prices, and longer-term based on structural trends of food security and ag investment. We reiterate our Outperform rating and $55 PT.
Key points:
Organic growth driven by new businesses and favourable ag trends: We remain upbeat on favourable ag fundamentals based on high grain volumes and prices while global ag infrastructure investment provides a longer-term positive tailwind. Growth in the International segment continues to exceed expectations as Ag Growth gains market share in Brazil and India, while North American ag markets remain in a cyclical uptrend. Although reported backlog growth decelerated in Q3, this was impacted by the removal of Russia/Ukraine related projects and reversal of steel cost pass-throughs from the prior 12 months. Management noted strong volume growth on a "unit' basis and stated confidence for continued growth into 2023. We currently assume moderate revenue growth at 8%/5% in 2023/2024, but could see potential for continued mid-teens growth rates if ag trends remain favourable and the company continues to execute well.
Margins benefit from operational improvements and normalizing steel cost headwinds: We expect margins to sustain recent increases and see line-of-sight to continued expansion over the next several years with growth in higher-margin businesses, ongoing operational improvements, and normalizing steel costs — we forecast 16% EBITDA margins in 2023/2024, rising to 17% in 2025, from 15-16% in 2020-2022. We were impressed with strong Q3/22 margins that while likely well-above trend, benefiting from a favourable mix and steel cost normalization, were also impacted by negative digital segment margins as sales were weighted toward subscriptions that have a short-term negative margin impact.
De-leveraging plans supported by strong FCF generation: Debt reduction is the primary capital allocation priority for Ag Growth as the company aims to achieve ~3x Net Debt/EBITDA by 2023 (vs. 4x today). We forecast substantial free cash flow for AGI of $93M and $128M for 2022 and 2023 (12% and 21% yield).
Potential re-rating opportunity: We see a potential re-rating opportunity for Ag Growth from the combination of revenue growth, margin expansion, and de-leveraging. Ag Growth currently trades at ~7x 2023E EBITDA, below ag equipment peers at ~10x and historical trading average of ~9x.
Reiterate Outperform, reiterate $55 PT: We are increasing 2022E and 2023E EBITDA to $230M and $249M, from $217M and $245M.