Ceres Global Ag Corp. (TSX: CRP) is an agricultural cereal grain storage, customer-specific procurement and supply ingredient company. The company operates through two business units: grain storage, handling and merchandising unit, and commodity logistic.

Pros:

• Strong Relative Strength: The stock outperformed the benchmark TSX Composite over the last 3-Month, 1-Month and 5-day trading sessions by 7%, 10% and 12%, respectively. Also, the stock outperformed the sector by 7% and 8% in the past 1-Month and 5-day trading sessions. This implies relative strength in the stock against the broader market.
• Traded Above Crucial Short-term Moving Averages: At the last closing, CRP shares traded above the short-term crucial support levels of 30-day and 50-day SMAs. Further, the moving averages are also surging higher, another positive trend.
• The leading momentum indicators, 14-day and 9-day RSI were hovering in a neutral zone and tilted towards the overbought zone.
• The Moving Average Convergence Divergence (MACD) is rising, with the difference between 12-day and 26-day EMAs is positive, which is a bullish indicator.
• The group reported an improvement in EBITDA margin, Operating margin and Net Margin on a sequential and YoY basis.
• Solid liquidity position, with current ratio at the end of June quarter, was at 1.67x, improved on sequential and YoY basis. The current ratio was better than the industry median of 1.62x.
• Lower debt contribution the company’s balance sheet, with Debt/Equity ratio, stood at 0.44x vs industry median 0.87x. Also, debt has been reduced in the June quarter against the previous quarter, which implies a lower balance sheet risk.

Cons

• Lower margin profile as compared to the industry median.
• Lower Return on Equity (RoE) at 3.1% against the industry medina of 13.1%.
• Stock trading below its long-term moving average of 200-day SMA.

2QFY20 Financial Highlights

• FY20 revenue improved on a YoY basis to CAD 581.7 million against CAD 438.4 million reported in the corresponding previous financial year. The increase in revenue was driven by the acquisition of Delmar in August 2019 which added CAD 69.0 million in incremental revenues along with the base business that increased bushels handled by 12 million bushels over the prior year.
• Gross Profit increased by CAD 13.0 million on a YoY basis primarily due to better grain trading and merchandising margins that increased by CAD 10.1 million over the prior year along with the acquisition of Delmar.
• Income from operations increased CAD 8.3 million compared to the previous year due to higher gross profits in grain trading and merchandising margins and the acquisition of Delmar that were partially offset by higher general and administrative costs and interest expenses associated with the acquisition and financing of Delmar.
• Net income for the year stood at CAD 4.3 million against a net loss of CAD 16.9 million for the year ended June 30, 2019. The increase was primarily related to CAD 8.3 million in improved income from operations over the prior year, along with CAD 8.2 million in a legal case that was settled in the prior year.

Source: Company Filings

Risks: The group is exposed to various risks such as volatility in supply and demand along with prices for grains and other agricultural commodities, interest rate and foreign exchange.

Stock Recommendation: The group reported a decent result led by improvement in revenue, EBITDA, and net income. Going forward, large crops and increased demand is expected for the 2020-2021 harvest year as growing conditions in North America have generally been favorable, and demand for cereal grains continues to be strong. This is expected to provide the group with opportunities to effectively utilize its asset infrastructure to serve customers in and beyond North America. Meanwhile, with the addition of assets from the 2019 acquisition of Delmar (Manitoba) and the Nicklen Siding elevator from Cargill Limited, (Saskatchewan) in early September 2020, the group is in a better position to provide its end-use customers with quality-specific products and solutions originating directly from growers in Manitoba and Saskatchewan. On the valuation front, the stock is trading at a discount compared to industry. The stock is trading at an LTM Price to Sales multiple of 0.13x compared to industry average of 0.48x. Hence, considering the aforementioned facts, we have given a “Speculative Buy” recommendation at the closing price of 3.20 on September 30, 2020.

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