Ag Growth International Inc.

Ag Growth International Inc. (TSX: AFN) is a leading provider of equipment solutions for agriculture bulk commodities including seed, fertilizer, grain, and feed systems with a growing platform in providing equipment and solutions for food processing facilities. AGI has manufacturing facilities in Canada, the United States, the United Kingdom, Brazil, France, Italy, and India and distributes its product globally.

The Company would disclose its second quarter results on August 12, 2020. The Company paid a cash dividend of CAD 0.15 per common share for the second quarter of FY20.

Q1FY20 Financial Highlights: Ag Growth International declared its quarterly results, wherein the Company reported revenue of CAD 229.107 million as compared to CAD 215.035 million in Q1FY19. The increase was driven by a 42% growth from the international segment, while a slide in sales from Canada remained a drag. The quarter witnessed an increase in the cost of goods sold due to higher inventory prices, which stood at CAD 167.945 million against CAD 151.280 million a year ago. During the quarter, the Company witnessed higher SG&A expense, higher depreciation/amortization, significantly higher finance costs due to inclusion of an FX loss amounting to CAD 22.322 million, which combinedly took a toll on the profitability. The Company reported a loss before income tax at CAD 57.563 million, as compared to a profit of CAD 17.821 million in the previous corresponding period. Net loss, during the quarter, stood at CAD 48.844 million, as compared to a profit of CAD 13.222 million pcp. The Company ended the quarter with a cash balance of CAD 3.603 million as compared to CAD 48.421 million on March 31, 2019.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Any changes in the timing of harvest or extreme weather conditions would impact the group’s performance. Further, a prolonged lockdown or further outbreak of the novel virus would disrupt the supply chain of the business.

Valuation Methodology (Illustrative): EV to Sales based valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of AFN corrected ~35% so far this year. The production in specific segments witnessed a halt due to the COVID 19 pandemic, resulting in a slide in production. However, the business has started its operations across the places and are operating at around 50% to 80% capacity. There was no production suspension to date in Canada. The management has deferred the growth capital expenditure to preserve the liquidity and decided to invest in maintenance capex. Further, the management believes that post-crisis demand will be positively impacted as the world builds additional redundancy into the global food infrastructure to account for similar events in the future. Within the international commercial segment, the company witnessed a higher order-inflow, reflecting a higher backlog. The stock soared ~24% in the last three months and outperformed the index by ~14%. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered Savaria Corp, Nutrien Ltd and Enwave Corp etc., as a peer group. The company has higher debt in its balance sheet. The company’s long term debt to capital ratio stood at 67.5%, which is higher than the industry average of 30.1%. Higher debt might pose a challenge going forward. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy' rating on the stock at the closing market price of CAD 30.05 as on July 28, 2020.

AGI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Recipe Unlimited Corp

Recipe Unlimited Corp (TSX: RECP) is a franchisor and restaurant operator based out of Canada. The Group was formerly known as Cara Operations Ltd and operations are divided into four reportable segments being food processing, franchise restaurants, corporate restaurants and distribution and central operations.

Recent News

On 21 May 2020, Recipe Unlimited Corp announced a rent subsidy program of $35 Million to assist franchise network with support through direct rent for the financial year 2020.

Financial Highlights – Q1 Financial Year 2020 (29 March 2020, CAD, thousand)

(Source: Quarterly Report, Company Website)

In the first quarter of the financial year 2020, due to lower sales and franchise revenue for the period, the total gross revenue declined to CAD 269,922 thousand (Q1 FY2019: CAD 304,647 thousand). Reflecting higher operating expenses for the period, the Group reported an operating loss for CAD 10,725 thousand in Q1 FY2020 (Q1 FY2019: Operating profit of CAD 31,516 thousand). The LBT (loss before tax) stood at CAD 50,063 thousand in the first quarter of the financial year 2020 (Q1 FY2019: PBT (profit before tax of CAD 31,307 thousand), reflecting higher interest expenses and change in fair value in funds units. The reported net loss for Q1 FY2020 stood at CAD 41,245 thousand (Q1 FY2019: Net Income of CAD 22,707 thousand). The basic loss per share stood at $0.73 in Q1 FY2020 (Q1 FY2019: basic earnings per share of $0.36), and diluted loss per share stood at $0.73 in Q1 FY2020 (Q1 FY2019: diluted earnings per share of $0.35). The cash balance as on 29 March 2020 stood at CAD 311, 928 thousand (29 December 2019: CAD 40,351 thousand, 31 March 2019: CAD 41,252 thousand).

Share Price Performance

Recipe Unlimited Corp shares closed at CAD 10.04 at the time of writing after the market close on 28 July 2020. Stock's 52 weeks High is CAD 27.71 and Low is CAD 7.47.

Key Risks

Due to the outbreak of covid-19 pandemic and imposed lockdown to contain the spread of the virus, the Company’s financial performance was impacted. The overall business of the Company could be affected by a change in regulations and government policies.

Conclusion

The Company has shown a decline in financial performance for the first quarter of the financial year 2020. Both the top-line and the bottom-line performance have declined, and profitability remained in the negative zone for the period. The revenue from core businesses has declined, while the Group managed to increase liquidity position significantly. After the easing in the restrictions, the Group’s operational and financial performance has started to recover but is still working at a limited capacity to follow the social distancing protocols. RECP in March withdrawn RCF (revolving credit facility) of $300.0 million to provide additional liquidity and suspended dividend payments. The Group believes that actions taken to boost liquidity requirements are sufficient for the short-term period, while the medium to long term performance is dependent on the macro-economic environment.

Based on the factors as highlighted above, we recommend investors to keep a “Watch” on the stock at the closing price of CAD 10.04 (as on 28 July 2020), with support from few catalysts needs to be evaluated at a later stage.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.