National Bank Financial analyst Richard Tse likes the look of newly-minted tech company Farmers Edge (Farmers Edge Stock Quote, Chart, News, Analysts, Financials TSX:FDGE). The analyst initiated coverage of the stock on Monday with an “Outperform” rating and a target price of $25.00, which at the time of publication represented a projected one-year return of 44.2 per cent.
Farmers Edge offers subscription services over its platform FarmCommand which gives customers products such as crop planning, soil monitoring, satellite imagery, fleet management and analytics. The company currently has over 3,000 customers with a combined more than 23 million in subscribed acres, while its subscription services charge between $1.50 and $6.00 per acre with an average contract term of three to five years.
The Winnipeg, Manitoba-based company has over 500 employees with offices in Canada, the US, Australia, Brazil and Ukraine and for its fiscal 2020, Farmers Edge generated about $46 million in revenue.
Farmers Edge just completed its IPO on March 3, 2021, issuing about 8.46 million shares at $17 per share. Including over-allotment, the total gross proceeds of the offering were about $143.8 million. Fairfax Financial Holdings is a 59-per-cent shareholder in the company, and Farmers Edge is headed by CEO and founder Wade Barnes and has had David Patrick previously of Exchange Income Corp as CFO since August 2020.
Tse said Farmers Edge has growth opportunities in an agriculture sector at the start of its digital transformation.
“As we’ve seen other industries increasingly benefit from overlaying insight from data, we believe that’s also a scaling opportunity in farming. The difference is that adoption rates based on our diligence are very early suggesting significant growth potential,” Tse wrote.
“We believe Farmers Edge is an early leader in this market with one of the most comprehensive offerings in the market that’s further differentiated by its independence. Off a F20E revenue base estimated at ~$46 million, we see that growing over 40 per cent (F21E) with EBITDA margins scaling from negative 13 per cent to over 20 per cent over the next two years,” Tse said.
On the industry as a whole, Tse said agriculture is entering another cycle of innovation. The sector has already adopted innovation and technology on crop inputs like seed and fertilizers, which have led to substantial production increases on relatively the same land use. Tse noted that wheat production has seen yields increase by 204 per cent over the past 50 years while land use for wheat has only grown by 13 per cent.
On top of that now comes the implementation of precision agriculture and connected equipment, a new innovation cycle in which Tse says Farmers Edge is playing a role. Tse estimated that through yield improvement and OPEX savings, the company’s platform averages a return on investment of 97 per cent for a typical 2,000-acre farm.
And while the ag tech space involves a boatload of competition, Tse thinks Farmers Edge’s breadth is a difference maker in what the analyst estimates as a total addressable market of $16.2 billion.
“When it comes to the range of players, they run from large well-heeled companies old and new to numerous small niche players offering specific solutions. But while there’s a considerable range, our side-by-side analysis points to Farmers Edge as having one of the widest breadth of offerings end-to-end from data capture (using its hardware devices in the field) all the way to insight/analytics – all of which are ‘connected’ by its FarmCommand Platform,” Tse wrote.
“With plus-50-per-cent revenue growth rate (NTM) and our estimated annual renewal rates in the 90 per cent range, we believe that’s a validating metric when it comes to Farmers Edge’s relative capabilities within a competitive market,” Tse said.
By the numbers, Tse is projecting FDGE to generate full 2020 revenue and adjusted EBITDA of $45.7 million and negative $46.4 million, respectively, 2021 revenue and EBITDA of $74.2 million and negative $9.3 million, respectively, and 2022 revenue and EBITDA of $115.4 million and $26.8 million, respectively. Tse estimates Farmers Edge’s cash position currently at $130 million and that the company currently has ample cash and liquidity to execute on its growth plan, with the analyst projecting FDGE to be cash flow positive by 2022.
Along with growth in its core business, Tse sees incremental growth opportunities for Farmers Edge in insurance and carbon offsets, with farming data offering the potential for risk abatement and lower premiums and, in the case of offsets, digital tracking and record keeping can enhance an operation’s ability to deploy high standards of practice.
Tse further sees opportunity in the form of acquisitions where the sector currently has many niche players focusing on a specific technology.
“In our view, potential technology acquisitions could enhance Farmers Edge’s strategic value by way of adding value-add technology which could enhance the Farmers Edge offering in the market. Additionally, the Company could acquire other Digital Ag consulting companies to increase total acres,” Tse wrote.