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.

Q2FY20 Financial Highlights: AFN declared quarterly results, wherein the Company posted revenue of CAD 257.938 million as compared to CAD 291.938 million in the previous corresponding period (pcp). The decline was majorly attributable to a significant fall in revenue from Canada region and a marginal dip from the United States while an improved sale from the international segment supported the top-line. Gross profit plunged to CAD 67.349 million against CAD 82.635 million in Q2FY19, primarily attributable to a lower sale, partially supported by lower cost of goods sold. Selling, general and administrative expense stood at par with the previous quarter while higher finance costs remained a drag. The Company reported a finance income of CAD 9.688 million as compared to CAD 5.029 million in pcp. Net profit stood higher at CAD 14.472 million as compared to CAD 12.516 million in Q2FY19. The quarter ended with cash and cash equivalents of CAD 22.897 million while total assets stood at CAD 1,514.063 million in pcp.

Q2FY20 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: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock of AFN corrected ~24% so far this year. The Company posted strong growth from the Brazil region due to the positive impact of recent strategic capital expenditures. The Company’s operations were hindered by a temporary suspension of operations across several places in Q2FY20. Currently, the Company is running at full capacity and reports no production suspension, which is encouraging. 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. We believe as the economy is moving towards normalization, the Company would deliver improved performance from its key markets which would improve the overall business prospects for the group. Management remains confident in the resilience of its business on account of the essential nature of farming and the food infrastructure. The group’s farm business remains very strong and has been largely unaffected by COVID-19. Diversification across the Feed, Fertilizer and Food platforms has supported the domestic Commercial business in a difficult environment, and as a result our North American Commercial backlogs are consistent with the prior year. Based on existing conditions, management anticipates adjusted EBITDA in the second half of 2020 will exceed 2019 results. The stock closed above the 200-days simple moving average (SMA) of CAD 34.34, indicating a bullish trend. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a lower double upside potential (in % terms). For the said purpose, we have considered peers Boyd Group Services Inc, Savaria Corp. etc. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ recommendation on the stock at the closing market price of CAD 34.96 on August 21, 2020.

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

Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.UN) operates in diversified business and provides industrial chemicals and services across North America. The company is a leading supplier of sulphuric acid, spent acid processing services, inorganic coagulants for water treatment, sodium chlorate, sodium nitrite, etc. across North America. It is one of the largest suppliers of sulphur, liquid sulphur dioxide, sodium hydrosulphite, zinc oxide and potassium chloride.

The company informed that it has increased the size of the previously announced bought deal offering to CAD 75 million of convertible unsecured subordinated debentures, at a price of CAD 1,000 per debenture, with an interest rate of 8.50% per annum. Also, the management declared a monthly dividend of CAD 0.05 per common share, payable on August 31, 2020.

Q2FY20 Financial Highlights: CHE.UN impresses with its bottom-line performance and reported a growth amidst a lower top-line. Revenue of the company stood lower at CAD 347.534 million as compared to CAD 396.735 million in the previous corresponding quarter. The decline was primarily attributable to lower sales volumes coupled with lower selling prices for hydrochloric acid and caustic soda within the Electrochemicals segment. Furthermore, a dip in the sales volume of Regen and merchant sulphuric acid in the Sulphur Products and Performance Chemicals segment contributed to the decline. The company reported a gross profit of CAD 32.622 million against a gross loss of CAD 12.282 million in the previous corresponding period (pcp). The quarter was marked by a lower selling and administrative expenses amounting to CAD 19.295 million against CAD 21.425 million in pcp. Income before income tax stood at CAD 10.621 million as compared to a loss of CAD 59.918 million in pcp, due to a significantly lower net finance costs in the current quarter. Net earnings stood at CAD 4.499 million as compared to a net loss of CAD 57.576 million, a year ago.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is linked to the oil and gas sector as products, such as regen sulphuric acid and hydrochloric acid, are extensively used within the oil and gas sector. A slowdown in oil and gas demand would impact the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The stock of CHE.UN corrected ~47% so far this year. Demand for certain of Chemtrade’s products such as water treatment chemicals has not been affected by the pandemic, whereas demand for most other products has been modestly lower. A considerable decline in the demand for gasoline had subsequently lowered the demand for regen services. As the economic activities are coming back on track, the Management expects a recovery in demand during the second half of the year, which is encouraging and would contribute to the cash flows. The Company has able to report a bottom-line growth amidst a fall in the total income by lowering its direct and indirect costs, which is noteworthy. Further, the group’s products are extensively used in the water treatment segment, and the demand is likely to remain stable in the foreseeable future, which is a key positive. Further, the group continued to distribute the dividend, which makes it an attractive bet from an income investor’s point of view. At the last traded price, the stock was offering a lucrative dividend yield of ~10.27%. 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 upside potential (in % terms). For the said purpose, we have considered peers like Nutrien Ltd., Mosaic Co etc. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ recommendation on the stock at the closing market price of CAD 5.84 on August 21, 2020.

CHE.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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