Ag Growth International is riding secular growth trends, says iA Capital

iA Capital Markets analyst Matthew Weekes believes there may be a solid harvest ahead for Ag Growth International (Ag Growth International Stock Quote, Charts, News, Analysts, Financials TSX:AFN), initiating coverage of the company on Wednesday with a “Speculative Buy” rating and target price of $44.00/share for a projected return of 58 per cent.

Founded in 1996 and headquartered in Winnipeg, Ag Growth International is a global manufacturer of equipment and infrastructure for the agri-food industry. The company has five platforms (seed, fertilizer, grain, feed, food), operating across six continents (North America, South America, Europe, Asia, Africa, Australia) and brings together seven components (storage, structures, process, handling, technology, engineering, and project management).

In his initial investment thesis, Weekes points out a number of positives the company has produced, including a combination of stable baseline revenues with growth opportunities and demand for its products supported by positive secular growth trends and a strong free cash flow profile, which should create improving financial flexibility over the near-term.

“AFN’s diversified business offers global reach with both defensive qualities and growth potential,” Weekes said. “We are constructive on AFN’s outlook, underpinned by secular growth trends in global food infrastructure investment and farm digitization, and we project substantial valuation upside for the stock.”

However, the company has also hit some challenges of late, as the collapse of one of its commercial storage bins in 2020 resulted in increased financial liabilities and recent legal claims being filed. 

While Weekes noted that the legal challenges could create uncertainty, he still believes the stock is trading at an attractive valuation point (7.5x on the 2022 EV/EBITDA, with its peers trading above 10x at minimum), and Ag Growth’s management team is confident in the company’s positioning and continued growth into 2022.

“We will close out 2021 with record annual revenue and adjusted EBITDA due to outstanding execution by our global team which continues to gain market share while also dealing with extreme supply chain disruption,” commented Tim Close, President and CEO of Ag Growth in the company’s update on October 14.

“As previously noted, the third quarter was impacted by supply chain disruption. However, this impact will ease in the fourth quarter and into 2022 as we have good visibility to strong fourth quarter results and substantial growth for the year over 2020. Our Technology business has been impacted by supply chain issues and COVID-related restrictions which have lasted much longer than anticipated. Despite these factors impacting near-term Technology growth, we have substantially increased our dealer base for Technology products and made significant progress on our IoT product, production automation, and capacity expansion initiatives,” said Close.

Weekes’s financial projections for Ag Growth show the company continuing to move forward as it’s positioned as a ten-figure revenue operation with a projection of $1.15 billion in play for 2021, with a projected jump to $1.24 billion for 2022 while getting into a position where it projects to have year-over-year quarterly improvements for three years running.

Meanwhile, Weekes also expects the company’s EBITDA to grow incrementally, projected a 12 per cent jump to $168 million in EBITDA in 2021 for a margin of 14.6 per cent, with another year-over-year increase of 10.1 per cent to $185 million in EBITDA in play for 2022, producing a margin of 14.9 per cent.

Weekes projects the company’s adjusted funds flow from operations (AFFO) per share to increase to $5.68/share in 2021 from the reported $5.00/share in 2020, followed by another jump to a projected $6.12/share in 2022.

Furthermore, Weekes’s valuation data for the company also shows gradual improvement for Ag Growth, as he projects the company’s EV/adjusted EBITDA multiple to fall from the reported 9.2x in 2020 to a projected 8.2x in 2021, then to a projected 7.4x in 2022. Meanwhile, Weekes’s projections for the company’s Price/AFFO multiple are forecast to drop from the reported 5.6x in 2020 to a projected 5x in 2021, then to a projected 4.6x in 2022.

Though the company has performed well from a financial perspective, the ongoing legal challenges prevent Weekes from going all in on the company right away.

“While we believe much of the downside from the legal claims against AFN is built in, we are reserving a degree of caution due to these claims creating uncertainty and overhang for a potentially extended period of time, particularly given AFN’s relatively elevated leverage and credit facility covenants,” Weekes said.

Overall, Ag Growth’s stock price is down 7.5 per cent for the year to date, reaching a high point of $45.78/share on March 22, bottoming out at $26.49/share on August 19.