Our view: We are upbeat on Ag Growth heading into H2/23 as the company continues to execute on operational improvement initiatives, lifting the expected margin profile and driving organic growth while also benefiting from favourable ag tailwinds. We continue to view shares as undervalued and see potential for a re-rate, driven by revenue growth, margin expansion, improved cash flow, and de-leveraging.
Key points:
Sales growth should continue to ramp up in H2: We remain constructive on ag fundamentals given high crop volumes and prices, in addition to longer-term tailwinds from global ag infrastructure investment. Growth in the International segment continues to progress well as AGI executes on product transfers and wins market share in key emerging regions (Brazil, India). While drought conditions in the US and Canada bring some uncertainty to H2, AGI maintains a strong order book in both regions, indicating impacts may be limited.
We forecast Farm sales to increase 14 , led by sustained demand for portable equipment in North America, particularly Canada due to a strong backlog, and continued gains in South America and Asia-Pacific. In Commercial, we forecast sales up 7% in 2023 and 2024, as stronger International sales offset recovering North American sales. Into 2024, we see still-strong ag fundamentals (high crop volumes and prices, strong farm incomes), potential benefit if rates peak, and a rebound in North American Commercial (Food Platform restructure, Fertilizer segment recovery).
Margin expansion progressing ahead of schedule: Management raised EBITDA margin guidance to >18% (from 17% previously) as AGI executes on operational improvement priorities, benefiting from recent restructuring initiatives and earlier-than-expected turnaround in the Digital sub- segment. While there has been some help from pricing power and positive mix shift, management noted 200bps of margin expansion can be considered a structural change and attributable to operational initiatives. Additionally, management was confident that the work to improve operations remains in the early stages, with long-term opportunities in both the day-to-day operations and larger structural changes.
Robust free cash flow generation still focused on de-leveraging: We forecast free cash flow inflecting higher in 2024 ($131M, 10% yield) from 2023 ($21M, 2% yield), driven by stronger earnings, no more bin incident related payments, lower transaction/restructuring costs, and better working capital management. We expect capital allocation to remain focused on reducing debt, and expect AGI will reach the year-end targeted leverage ratio of 3.0x with ease from 3.2x net debt to EBITDA today.
Reiterate Outperform, raise PT to $75:
We raise our 2023E and 2024E EBITDA to $290M and $301M, respectively, from $265M and $284M.