Ag Growth International Inc T.AFN

Scotia $83 - Hopefully easier to read

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OUR TAKE: Positive. In 2023, EBITDA grew by 25%, margins expanded 320bp, net debt declined to 2.8x (from 3.7x), and the order book grew 25%. 4Q EBITDA increased 43% (and was in-line with the Street).

The major highlight in AFN’s release is its 2024 EBITDA guidance: management is calling for EBITDA of >$310 million in 2024, implying growth of >5%. We believe its ability to sustain growth in a “down year” in ag will help clinch re-rate in the shares. For context, AFN shares trade at 6.5x EV/EBITDA on our 2024E (vs. historical average of 9.0x), which, in our view, reflects the market’s view that AFN’s earnings were poised to retrench alongside farmer incomes/other ag players — but that is clearly not the case. Additionally, in 2023, AFN initially guided to EBITDA of >$260 million and finished with $294 million (i.e. management typically guides conservatively to start). In our view, 4Q results and its 2024 guidance reinforce our view that there is meaningful upside in AFN shares. We will update our estimates following the company’s conference call tomorrow at 8am.

KEY POINTS

For 2024, management is guiding to adj. EBITDA of “at least $310 million”. Its order book climbed to $747 million from $597 million last year (+25%). Further, given the project-based nature of its strengthening Commercial order book and the expected timing of such orders, it expects a gradual ramp-up in EBITDA through 2024.

For 4Q23, AFN reported sales/EBITDA of $379.3 million/$73.1 million vs. consensus of $413.4 million/$72.5 million. On a consolidated basis, sales grew 1% while EBITDA grew 43% y/y. EBITDA margins expanded 560bp to 19.3%.

• Farm sales/EBITDA increased 4%/44%. The increase in sales was driven by strong demand in the U.S. Farm EBITDA margins of 24.7% increased 678bp driven primarily by favorable mix, manufacturing efficiency initiatives and digital reorganization completed throughout the year.
• Commercial sales decreased 1% while EBITDA increased 17%. Sales were negatively impacted by tough comps in Canada despite strong revenue growth in APAC. However, EBITDA margins of 18.8% expanded 295bp due to operational excellence initiatives implemented.
• By region, sales increased 10% and 2% in the U.S. and International, offset by 13% lower sales in Canada.

Net debt to EBITDA declined to 2.8x as at the end of 4Q (vs. 3.2x as at 3Q23). The company expects to reduce net debt leverage to ~2.5x or below in the year.