Ag Growth International Inc.

Ag Growth International Inc. (TSX: AFN) produces 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.

The Management announced a quarterly dividend of CAD 0.15 per common share, payable July 15, 2020.

Q1FY19 Financial Highlights: Ag Growth International declared its quarterly results, wherein the Company posted a higher revenue while failed to maintain the momentum in the bottom-line on account of loss on financial instruments. The Company reported sales of CAD 229.10 million, as compared to CAD 215.03 million in Q1FY19. The increase was underpinned by a stupendous 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, which stood at CAD 167.94 million against CAD 151.28 million in Q1FY19, due to an increase in the inventory price. The quarter was marked by a higher SG&A expense, higher depreciation/amortization, increase in finance costs and FX loss. The Company reported a loss before income tax at CAD 57.56 million, as compared to a profit of CAD 17.82 million in the previous corresponding period (pcp). Net loss, during the quarter, stood at CAD 48.84 million, as compared to a profit of CAD 13.22 million pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

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

Valuation Methodology: Price to CF Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of AFN corrected ~42% so far this year, due to a weak investor’s sentiment. The company witnessed temporary suspension in production for about two to four- weeks during the latter part of the first quarter and during early Q2 across Italy, France, Brazil, India and the United States. 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 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 management has deferred the growth capital expenditure to preserve the liquidity and decided to invest in maintenance capex. The stock witnessed a pullback rally in the recent past and sored ~66% in the last three months. We have valued the stock using Price to CF based relative valuation approach and considered peers like Boyd Group Services Inc, Superior Plus Corp and Savaria Corp etc.  and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 27.01 on July 6, 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 majorly to North America and other parts of the world also. 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.

The Company announced a monthly dividend of CAD 0.05 per common share, payable July 31, 2020.

Q1FY20 Financial Highlights: Chemtrade Logistics declared its quarterly result and posted a lower revenue of CAD 366.90 million compared to CAD 385.25 million in Q1FY19. The decline was primarily attributable to a decline in realization price of caustic soda and hydrochloric acid followed by lower sales volume of sulphuric acid and other sulphur products and performance chemicals. The Company reported the operating loss of CAD 51.54 million, significantly higher than the operating loss of CAD 19.74 million, a year ago. The decline was primarily attributed to a higher cost of sales & services and an increase in the selling & administrative expenses. The Group posted a higher Adjusted EBITDA of CAD 80.88 million, as compared to CAD 43.96 million in pcp, due to the add-back of impairment of goodwill expense amounting to CAD 56 million in the current quarter. Net finance costs stood at CAD 67.45 million, considerably higher than CAD 27.11 million, majorly due to a significant surge in a change in the fair value of convertible debentures. Net loss widened to CAD 97.87 million from CAD 29.32 million in Q1FY19. The Group ended the quarter with cash and cash equivalent of CAD 52.17 million while total assets stood at CAD 2,837.91 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s 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: Price to CF Based Relative Valuation (Illustrative)

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

Stock Recommendation: The Company expects, the prices of the caustic soda to remain stable throughout the year, which is likely to stabilize cash flows. The group’s products are extensively used within the oil and gas sector. We expect an improved demand from crude oil and natural gas, driven by higher industrial and manufacturing activities, as several governments are easing ongoing restrictions. Consequently, demand for the group’s product would also improve in the near to medium term. The Company has ample liquidity, which includes CAD 457.0 under a five-year term loan and CAD 738.3 million under revolving credit facilities. The current liquidity position seems sufficient enough to weather the current downturn and to fund its near-term working capital requirements. Though the group’s performance deteriorated in the recent past, the stock seems to be an attractive bet for the income investors. At the last traded price, the stock was offering a dividend yield of 11.07%, which is lucrative considering the current interest rate environment. However, dividend yield seems a bit inflated considering the recent price correction. We have valued the stock using Price to CF based relative valuation approach and considered peer like Superior Plus Corp, Nutrien Ltd etc.  and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 5.42 as on July 6, 2020.

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

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