Down 40 per cent, what’s happening with Ag Growth?

Ag Growth International (Ag Growth International Stock Quote, Charts, News, Analysts, Financials TSX:AFN) has seen its share price pummelled in recent months, even as the company’s quarterly results look great. What’s the story? 

Colin Stewart of JC Clark Limited says it’s less to do with operations for the farm equipment and agro-tech company and more about a pending lawsuit.

“We still think it’s a solid business. Ag Growth is in the agricultural equipment space, and the macro area or the industry conditions right now are actually very good,” said Stewart, CEO of JC Clark, who spoke about Ag Growth in a segment on BNN Bloomberg on Tuesday. 

“There’s a lot of demand for farm equipment and farmers had very good years in the last couple of years so they’re flush with cash and they’re buying new equipment,” he said. “Specific to Ag Growth, what’s happened is they were hit with a lawsuit in the last four or five months due to a grain bin collapse issue they had with one of their customers on the West Coast. That has turned out to be an overhang on the stock.”

This past June, news broke that Fibreco Export Inc was suing Ag Growth, which makes agricultural equipment and custom designed farm and commercial systems, over the September 2020 collapse of a silo at a North Vancouver grain terminal alleging poor engineering. The suit names Ag Growth subsidiaries Westeel and Union Iron along with engineer Donald W. Deal, with Fibreco saying that it could lose $80 million in revenue due to the event.

Concerns had reportedly been raised about the structural integrity of the silo in the weeks leading up to the collapse, with Fibreco claiming that Ag Growth failed to apply industry standards resulting in an under-designed silo. In May of 2019, an Ag Growth silo sand bin collapsed in Fox Creek, Alberta, killing two workers. 

The initial collapse of the North Van silo in Sept 2020 had temporarily dropped AGI’s share price but the stock then rallied over the back end of the year and into 2021 to almost reach pre-pandemic levels, but since then Ag Growth has tumbled, going from about $45 in March to now in the $27-$28 range.

On the lawsuit, Ag Growth CEO President and CEO Tim Close said a resolution likely won’t be quick.

“It is expected to take some time. These are complex issues in clients obviously we expect it’ll take years,” said Close in the company’s second quarter 2021 conference call in August.

Stewart said the overhang on the stock will also likely persist until the legal matter is resolved.

“I think it’s likely temporary. The company has told investors that they’ve provisioned for [the lawsuit], and we generally believe that’s true, but many times when you see a company with a lawsuit like that, until they’ve been able to actually settle it and work through those challenges that the company is certainly in the short term in the penalty box,” Stewart said.

“We still own a little bit of stock. We’ve definitely trimmed our position just because of that near-term risk. I think they really need to get through this legal issue with one of their product failures until we can see the stock revalue,” he said.

Investors will be watching the company’s progress as it presents its third quarter financials on November 11. Ag Growth saw revenue climb 15 per cent year-over-year to $302 million in its second quarter 2021, released in mid-August, with adjusted EBITDA rising five per cent to $46.2 million. The company’s backlog grew by a huge 69 per cent on a comparison basis with 2020’s second quarter, with management calling for robust growth throughout the remainder of 2021. 

“Our strong second quarter results continue to highlight the benefits of AGI’s growth and diversification over the past several years,” said Close in a press release. “Broad-based growth and market share gains across Brazil, India, U.S. Farm, our Technology business as well as our Food platform underpinned an excellent quarter despite significant supply chain issues globally. With record backlogs across the business, up 69 per cent over last year, AGI is well positioned for a strong finish to 2021 and going forward.”

Earlier this month, Ag Growth delivered a corporate update, saying it expects Q3 sales to increase year-over-year but that adjusted EBITDA could be lower due to higher steel prices and supply chain challenges. The company said full-year 2021 adjusted EBITDA would be “at least $170 million,” which would represent a rise over 2020’s $149.3 million.

“Our Technology business has been impacted by supply chain issues and COVID-related restrictions which have lasted much longer than anticipated,” said Close in the update. “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. As a result, we are well positioned to ramp up Technology growth as we head into 2022.”