Ag Growth International Inc.

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

Key Updates:

• Improved Performance metrics: The group’s operation is resilient in nature and reported improved trade sales and Adjusted EBITDA in 9MFY20, which is a key positive. Historically, the company’s nine-months performance has remained elevated, supported by strong sales network and the company’s constant focus on customer service.                    

Historical performance on 9Months basis (Source: Company Presentation)

• Impressive Guidance: Despite a slide in the overall performance during H1FY20 due to COVID 19 pandemic, the group expects its sales and adjusted EBITDA to remain in line with FY19. Moreover, International markets are expected to remain strong with impressive backlogs and very active pipelines. The group is witnessing higher traction from Brazil, EMEA, and India which has further supported in higher backlogs on a y-o-y basis. North American Farm segment reported strong growth, driven by improved demand dynamics, rising crop prices, and favorable dealer positions inventory, which is encouraging as well. 

• Bullish Technical Indicators: The stock of AFN closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. In the recent past, the stock gained momentum and appreciated ~35% and ~42%, respectively in the last three months and nine months, respectively.

(Source: Refinitiv, Thomson Reuters)

Q3FY20 Financial Highlights:

• AFN announced its quarterly results, wherein the group posted sales of CAD 281.408 million, higher than CAD 260.198 million in the previous corresponding period (pcp). The growth was driven by improved sales from all the segments.

Sales Bifurcation (Source: Company Reports)

• The group posted a lower gross profit of CAD 46.855 million, stood lower than CAD 65.510 million in Q3FY19.
• The group reported its total expenses at CAD 65.572 million, lower than CAD 73.115 million in Q3FY19, supported by a finance income as compared to a finance cost in pcp. Moreover, other operating income stood at CAD 1.117 million, as compared to an operating expense of CAD 6.870 million in pcp.
• The group reported a loss for the period at CAD 12.261 million, higher than CAD 2.819 million in pcp.
• The company reported cash and cash equivalents of CAD 74.825 million, while total assets were recorded at CAD 1,556.828 million.                        

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The operations of the company are correlated to the agricultural scenario, and are exposed to several macro and micro risks, such as fluctuations in the commodity prices, timing and conditions of harvest, volatility in currency etc. The above factors might impact the demand for the company’s products.

Valuation Methodology (Illustrative): Price to Cash Flow based valuation.

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The group is expanding its footprints across Southeast Asia due to strong underlying demand for rice within the region. Within the Brazil geography, the group has wider product offerings, and the company is seeking expansion within the region through boosting its LATAM sales, and channel development strategy, supported by a leading third-party consulting firm. Moreover, the group reported strong growth in funds from operations at CAD 82.059 million for 9MFY20, as compared to CAD 73.477 million, a year ago. The group made prudent capital management and lowered its dividend payout ratio to 21% during 9MFY20, versus 46%, a year ago, to retain its liquidity levels. We have valued the stock using the NTM Peer’s Median P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers Boyd Group Services Inc, Savaria Corp etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 38.26 on February 17, 2021.

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

Medipharm Labs Corp

Medipharm Labs Corp. (TSX: LABS), is a Canada-based medicinal cannabis company specializing in the pharmaceutical grade production of cannabis. The Company is focused on distillation and cannabinoid isolation and purification. The Company actively builds an inventory of specialized consumer products in anticipation of federal legalization of Canada's adult-use market.

Key highlights 

• Change in senior management: Recently, the company announce that Mr Warren Everitt has been appointed to its “Board of Directors” and Mr Greg Hunter has joined as Chief Financial Officer (CFO). 

• First to market products launched:MediPharm Labs also became the first and only producer in Canada to launch a consumer-sized, 99% pure CBD isolate in Canada. The company would broaden its marketplace to include consumers who favour an all-natural, high-quality/high-potency cannabinoid wellness supplement. We expect the initial sales to be strong as MediPharm Labs’ CBD Isolate remains the only product available in its class.

• Company shipped record finished goods of 550,000 units:The shipment volume is a key measure that illustrates growing market demand and the company’s ability to meet that demand. At the beginning of Q4 2020, Total units shipped increased by 205% over Q3 2020 as production takes flight for many top cannabis brands.

• Focused on international growth: The Company positioned themselves for the next wave of growth in global cannabis markets by purchasing 100% control of MediPharm Labs Australia from a local partner, making MediPharm Labs Australia a wholly-owned subsidiary of the Company. They also entered into a new supply contracts with companies in several South American and European markets, increasing its global reach. We believe this would enhance their space worldwide in medicinal, wellness and adult-use markets. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company posted revenue of CAD 4.9 million, compared to CAD 43.3 million in Q2 2019 due to a reduction in the average selling price and volume of bulk extracts sold during these periods which was partially offset by growing sales of consumer-packaged goods to provincial distributors throughout Canada.

• Gross loss of CAD 10.6 million was recorded in Q3 2020, against a gross profit of CAD 14.7 million in the previous corresponding period, primarily due to the written down of inventory to its net realizable value owing to the continued oversupply in the Canadian domestic bulk concentrates market.

• The company reported a Net loss of CAD 15.3 million in Q3 2020, compared to a net profit of CAD 3.2 million in Q3 2019. The loss was booked due to write-down of inventory, coupled with high G&A expenses, higher selling expenses, partially offset by an unrealized gain in derivatives.

• The Company maintained approximately CAD 36.5 million in cash and cash equivalents at the end of the third quarter. 

Risks associated with investment

Several risk factors could impact the company’s ability to execute its key strategies successfully and materially affect future events and financial performance. Some of these risks include reliance on licences and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, lack of long-term client commitments, etc. 

Stock recommendation 

The company is willing to focus on creating and distributing finished formulated products throughout the Canadian and Australian domestic channels and into other international markets. The company is expecting the proportion of sales mix to be comprised of finished formulated products would increase as it is continuously expanding the breadth (product formats) and depth (SKUs per product format) of the finished formulated product capabilities. With a record shipment of 550,000 units along with the launch of new products first in the market; the Company is making all efforts to accelerate growth and improve profitability in 2021. On the valuation front, the stock is available at forward EV/Sales multiple of 1.1x against the industry median of 5.1x. Hence, considering the aforesaid rationale, we have given a ‘Speculative Buy’ rating in the stock at the closing price of CAD 0.8 on February 17, 2021.

Source: Refinitiv (Thomson Reuters)

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.