Ag Growth International Inc T.AFN

Holy Molley - Scotia Sees $80/share in 2024

[SunsetGrill]

we see share price upside upwards of $80/share based on our 2024E.

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Delivering a Shareholder Friendly Message

OUR TAKE: Positive. We attended AGI’s investor day hosted by CEO Paul Householder and CFO Jim Rudyk. The message we heard: following years of M&A, management is focused on integrating AGI’s operating assets into one global company, extracting revenue/cost synergies, and driving shareholder value through (higher-ROIC) organic growth, capital discipline, and B/S deleveraging. Management outlined a plan to achieve continued growth (>$3 billion in LT sales), improve margins (+100bp-200bp; 17%-18%), and delever its B/S (low-3x by end of 2023). Confidence in its ability to grow market share, cross-sell existing products across its regions, expand margins, and enhance WC/capex ratios support our view that much of the value creation is within its ‘controllables’. Layer on the underlying growth trend for grain and food infrastructure, particularly in emerging markets, and the potential profit growth and share upside in the next 2 to 3 years is significant, in our view.

KEY POINTS

Doing more with what it (already) has. AGI grew sales from $400 million in 2014 to $1 billion in 2020 mainly through M&A. In the last two years, it achieved organic growth of ~40%. A few key highlights in the presentation were: (i) an estimated $4 billion sales opportunity by cross-selling existing product lines sold across its operating regions, (ii) a target to increase aftermarket parts and service to 10% of sales, (iii) its successful track record for growth in Brazil (+180% growth since 2020), APAC (+50%), and EMEA (+30%). The significant growth in crop production, changing trade flows, and need to invest in food and grain infrastructure in emerging economies highlight how well-positioned the company is to capitalize on the multi-year growth runway.

Momentum to continue in 2023 (and beyond). Management reiterated its 2022 EBITDA guidance of >$228 million; expects EBITDA growth in 2023; noted that AGI’s sales pipeline and backlogs continued to be very strong; and guided to 100bp of EBITDA improvement in the near-term (and +100bp more beyond). The company stopped short of providing 2023 EBITDA guidance: however, we think an achievable range is $250 million (17% margins; 2% organic growth) to $270 million (17% margins; 10% organic growth) – and see upside to our 2023E and 2024E. Net debt is expected to exit 2023 in the low-3x.

Room for continued upside. Despite the recent run-up, AFN shares trade ~20% below its 2019-peak despite our 2023E EBITDA being 60% higher (or ~$100 million; ~$900 million in equity value using 9x) and net debt and s/o being largely similar vs 2019. Continued profit growth, B/S delevering, and multiple expansion underpin meaningful potential upside: if AFN’s multiple normalizes to its pre-pandemic average, we see share price upside upwards of $80/share based on our 2024E.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Note: The payout ratio is calculated based on dividend as a percentage of FFOPS.

Qtly Adj EBITDA (M)	Q1	Q2	Q3	Q4	Year	EV/Adj. EBITDA
2021A	$39	$46	$46	$45	$176	8.6x
2022E	$41	$66	$76	$48	$231	7.9x
2023E	$46	$75	$78	$56	$255	7.2x
2024E	$51	$80	$79	$58	$268	6.4x

Paul Householder and Jim Rudyk clearly articulated how the company is expected to achieve profitable growth (secular growth, particularly in emerging countries, and sizable internal opportunities), improved margins (i.e., pricing and cost discipline, overhead and facility rationalization, operating leverage), and B/S deleveraging (w/ EBITDA growth and debt repayment).

Profitable growth. The company outlined several levers to drive profitable organic growth. AGI grew sales to $1 billion in 2020 from $400 million in 2014 mainly through M&A. In the last two years, its sales grew to ~$1.4 billion primarily through organic means. The company envisions growing sales to $2 billion...and then to >$3 billion, longer-term.

• At the macro level, the secular growth story centers agriculture market growth in emerging markets, which is strong and is expected to remain elevated for several years. In particular, 2022 was a record year for Brazil and the company expects crop production to increase another 10% in 2023. As crop production in Brazil has far outpaced most other regions, management highlighted how there was only enough storage in Brazil to store 10% to 15% of the annual harvest, whereas in the U.S. and Canada there was 60% to 70%. The expectation is that its business in Brazil was well positioned for double-digit growth for potentially several years. India, Africa, and Southeast Asia are also markets where growth is expected to remain robust.
• Management outlined its “product transfer” strategy, which represents a $4 billion market with company aiming to attain >20% share in most of its regional markets. The strategy essentially boils down to cross-selling existing and well-established AGI products into other geographies where the company is currently not selling these products. Management highlighted some current examples, including enclosed conveyor belts transferred to Brazil, storage bin and portable grain handling products transferred to India and fertilizer products transferred to EMEA. Management noted dozens of other opportunities and is targeting four to six product transfers per year. Management also discussed its increased focus on product innovation.
• Similar to the product transfer strategy, the company aims to expand its food processing capabilities to other regions. The company has had success in processing solutions (i.e. rice milling, fertilizer, food, feed) and aims to offer these products globally.

• Management sees an opportunity to broaden customer partnerships and gain share of wallet with an aftermarket parts and service offering, targeting for 10% of the company’s sales to come from higher-margin aftermarket sales (vs. “significantly below that level” currently). It is aiming to replicate its success in India where aftermarket penetration is ~9% of sales.
• In AGI Digital, the company reorganized the business to focus on key products where there is demonstrated demand and rightsizing the cost structure. We believe the restructuring will add 80bp to 100bp in margin upside in 2023.

Operational excellence. The company reiterated its target for adjusted EBITDA margins of 17% in the near-term. In the medium-term, we believe the company can achieve EBITDA margins of 18% (or more), with initiatives to enhance operating leverage, pricing discipline, cost discipline, and increased aftermarket sales.

• Between 2014 and 2020, AGI grew sales by 150% mostly through M&A. Management put the pause button on M&A to focus on integration. It is currently looking at standardizing products, rationalizing its manufacturing base, consolidating administrative overhead (e.g., centralizing corporate HQ in Chicago) functions, and streamlining processes. Generally, after years of inorganic investment, the company is looking to grow into its manufacturing base.
• The silver lining of the significant scale and pace of steel price increases in 2020-2021 was that it provided the company an opportunity to revisit its pricing strategy. It has introduced new disciplines into the organization with initiatives such as locking in margins the moment a customer places an order (Commercial), adding clauses to revisit pricing if costs increase (Commercial) and more frequently updating price catalogs depending on market conditions (Farm).

B/S delevering. Management is aiming to decrease leverage to 2.5x net to EBITDA from low-4x as at 3Q22.

• Natural deleveraging. The company reiterated its 2022 guide for adjusted EBITDA of at least $228 million. It expects EBITDA growth in 2023. Management noted that the sales pipeline and backlogs continue to be very strong. We forecast net debt to EBITDA (inclusive of provisions) of 3.5x exiting 2023.
• All focus on debt repayment. Excess FCF will be used to pay down debt. The company is focusing on WC discipline such that it expects WC to expand at a slower rate than sales. Annual capex is expected to be around $40 million to $50 million per year, inclusive of growth capital. Management noted that it has sufficient capacity in India and Brazil to achieve its growth objectives. Management further noted that it would look to potentially expand its capital expenditures as the B/S delevered and the company meets its N-T growth objectives.

 

Exhibit 1 - Organic Growth w/ Internally Driven Opportunities

Source: Company presentation.

Exhibit 2 - Enhancing Equity Value w/ Debt Repayment

Source: Company presentation.

Exhibit 3 - Capital Efficiencies from WC...

Source: Company presentations.

Exhibit 4 - ...and Capex Discipline

Source: Company presentations