Ag Growth International Inc.

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

On September 08, 2020, the company announced the appointment of Jim Rudyk for the position of CFO, wherein Jim would look after for finance, accounting, business intelligence and information technology etc.

Q2FY20 Financial Highlights: AFN declared its quarterly results, wherein the group reported sales of CAD 257.938 million, lower than CAD 291.938 million reported in the previous corresponding period (pcp). The decrease was due to a plunge in revenue from Canada region, coupled with a tepid performance from the United States, which was partially offset by an improved sale from the international segment. Gross profit stood lower at CAD 67.349 million, lower than CAD 82.635 million in pcp, due to lower top-line. The quarter was marked by a marginal fall in selling, general and administrative expense, the inclusion of other operating income and a higher finance cost. Profit before income tax stood higher at CAD 18.364 million as compared to CAD 16.675 million in pcp. The company reported a higher bottom-line at CAD 14.472 million as compared to CAD 12.516 million in pcp. The company reported cash and cash equivalent of CAD 22.897 million, while total assets were posted at CAD 1,514.063 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: Due to extreme weather condition, there might be a change in the harvest time, which would likely to impact the group’s performance. Further, the second wave of the novel virus would disrupt the supply chain of the business.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation:  The stock soared ~21% and ~26% in the last three months and six-months, respectively. The company's business stood resilient during the COVID 19, and the farm segment remains robust and remained unaffected by COVID-19 pandemic. Within the Canada region, the business witnessed an order pickup during June 2020, which is a key positive and indicates for a strong third-quarter performance. Crop conditions and demand remain favourable in Canada, and the United States and the business reported a ~25% growth in order backlog at the end of Q22020, which is a key positive. The international segment performed well, aided by strong growth from Brazil and India and reported an improved order backlog. Management remains confident in the resilience of its business on account of the essential nature of farming and the food infrastructure. Based on existing conditions, management anticipates adjusted EBITDA in the second half of 2020 will exceed 2019 results. The company is currently operating at full capacity across all locations, which is impressive. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Food & Tobacco) average on the next twelve months (NTM) basis. Considering the aforesaid facts, current price movement, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 34.80 on September 14, 2020.

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

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