Ag Growth International Inc. (TSX: AFN) manufactures portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems.

Key Updates:

• Higher traction within the Farm equipment: The demand for the Farm equipment stood strong in Q3FY21, as customers focuses on purchasing critical equipment in order to increase their crop volumes. Notably, at the end of Q3FY21, the company’s farm equipment backlog grew 202% on y-o-y basis driven by strong growth across all geographies including the U.S. as well as Brazil.

• Increase in Adjusted EBITDA: In 9MFY21, the company reported its Adjusted EBITDA of CAD 131.6 million, higher than CAD 121.5 million in 9MFY20, aided by the increased contribution from the farm segment. This indicates higher profitability and is a key positive.

• Strong momentum from the Food platform segment: During Q3FY21, the group reported 153% y-o-y growth in Food platform backlogs. The growth was supported by robust demand from the food and beverage end markets, higher repeat business from existing customers, coupled with onboarding of new customers during the period. The group expects the momentum to continue in Q4FY21 and Q1FY22 as well, which is likely to support the company’s upcoming performance.
  

Risks Associated with Investment: The operations of the company are correlated to the current economic scenario and are related to several macro and micro risks, such as fluctuations in the commodity prices, timing and conditions of harvest, volatility in currency etc. 

Q3FY21 Financial Highlights: (In thousands of CAD)

Q3FY21 Income Statement Highlights (Source: Company Report)

• AFN declared its third quarter results, wherein the company posted its sales of CAD 313.6 million, as compared to CAD 281.4 million in pcp. The improvement was due to higher income from the United States (CAD 147.4 million v/s CAD 131.3 million in pcp).
• Gross profit soared to CAD 85.5 million in Q3FY21 from CAD 46.8 million in pcp, supported by higher revenue, coupled with lower cost of sales (CAD 228.1 million v/s CAD 234.5 million in pcp).
• The quarter witnessed higher selling, general and administrative costs combined with an inclusion of finance expense and other operating expense, respectively, as compared to finance income and other operating income, respectively, in pcp.
• Net loss stood at CAD 0.07 million, as compared to a net loss of CAD 12.2 million in pcp.
  

 Valuation Methodology (Illustrative): Price to Earnings-based

Analysis by Kalkine Group

Stock Recommendation:

On the month of January 2022, the company acquired Eastern Fabricators, which specializes in the engineering, design, fabrication, and installation of high-quality stainless-steel equipment and systems for food processors. This collaboration is expected to drive strong revenue synergies in coming quarters, as Eastern has strong customer relationships through its superior project execution. The stock of AFN closed above its 50-days and 100-days simple moving averages (SMA’s), which indicates a bullish pattern. We have valued the stock using the P/E based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Superior Plus Corp, Enerflex Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock the closing price of CAD 35.72 on February 15, 2022.

One-Year Technical Price Chart (as on February 15, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV. 

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