TSX:AFN - Post Discussion
Post by
retiredcf on Jul 25, 2023 9:07am
RBC
Their upside scenario target is $80.00. GLTA
Outperform
TSX: AFN; CAD 52.34
Price Target CAD 70.00
AGI (Ag Growth International)
Q2/23 Preview: Continued operational execution and drought conditions in focus
Our view: We expect solid Q2 results for AGI as sales growth and margin expansion priorities continue to progress, but note drought conditions in Canada/US could weigh on demand near-term. Looking ahead to the quarter, we are watching international sales growth, margin normalization, and progress on deleveraging the balance sheet. We remain constructive on AGI as we see potential for shares to re-rate to historical averages and close the gap to peers as the company executes on strategic initiatives against a supportive global ag backdrop.
Key points:
Positive global ag environment offset by possible demand challenges in Canada: Underlying ag fundamentals remain very supportive given strong global crop prices and production, which paired with solid backlogs should drive higher sales y/y. We forecast revenue of $405M vs. $390M in Q2/22 (+4% y/y). In terms of costs, we forecast SG&A costs to normalize and unwind re-organization related costs from Q1 while continued operational execution should help improve gross margins. We forecast EBITDA of $72M (17.9% margin) vs. EBITDA of $66M (16.9% margin) in Q2/22.
Progress on strategic priorities and potential drought headwinds the focus for H2: Drought conditions in the US and Canada threaten crop yields and production this year, and thereby impact near-term demand for AGI's products near-term. However, the projected drought impacts are currently moderate when compared to past periods of extreme drought that impacted earnings potential (i.e. 2012/13 season) We prefer to look through near-term weather volatility and focus on the long-term business performance and strategy execution. We also note AGI has become a much more diverse company over the past decade, both in product offerings and geographic reach. In the quarter, we will be looking for commentary on crop impacts, progress on ex-Canada sales growth, operational execution and SG&A normalization for margin expansion, and continued deleveraging which will all likely remain a focus for the remainder of 2023.
Deleveraging plans supported by strong cash flow generation: We estimate $152M of FCF in 2023E (~15% yield). The top capital allocation priority for management is still balance sheet deleveraging. Net debt is currently $832M, and we estimate net debt to LTM EBITDA of 3.4x, with a target of ~3x by the end of 2023. We will also be tracking progress on working capital management (target of 10-12% of sales vs. ~16% currently), which would further improve FCF generation.
Reiterating Outperform rating, PT remains unchanged at $70. We slightly lower our 2023E EBITDA to $264M (16.8% margin) from $266M, vs. guidance of >$265M (~17.0% margin) and consensus of $268M.
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