Ag Growth International Inc. (AFN), the worst performing farm equipment stock among its North American peers, says it will rebound this year by tapping Russian demand for modern grain storage.
Ag Growth, which sells silos and conveyor belts and other agriculture machinery to companies including Archer-Daniels- Midland Co. (ADM:US), fell 19 percent in the past 12 months, the most among six competitors, data compiled by Bloomberg show.
“A lot of the progressive corporate farms in the former Soviet Union are looking to North America for proper grain storage because existing storage is antiquated,” Chief Executive Officer Gary Anderson, 58, said in a phone interview from his office in Winnipeg, Manitoba. “We want to provide it.”
Ag Growth is expanding outside the U.S. and Canada, which make up about 80 percent of the company’s business, after the worst drought since the 1930s in the U.S. cut demand for equipment last year, sending Ag Growth’s earnings per share to the lowest since 2006. Anderson said he will increase revenue by expanding marketing in former Soviet Union countries including Russia, which is forecast to raise grain production about 30 percent this year.
The company is more exposed than some of its competitors to the weather because it sells only farm equipment while companies such as Toro Co. (TTC:US) and Deere & Co. (DE:US) sell to other industries including landscaping and construction.
Ag Growth reported sales of C$314.6 million ($307.6 million) last year, up 4.5 percent from 2011. That was the slowest since 2005, its first full year since its initial public offering in 2004, as “demand for grain handling equipment, particularly higher margin portable equipment, decreased substantially,” the company said in a statement. Earnings dropped 30 percent to C$1.37 a share from a year ago.
International sales, which have risen 240 percent in the past three years compared with a 17 percent rise in the U.S, will replace Canada as the company’s second-largest market next year, Anderson said. Eastern Europe will comprise 80 percent of sales to foreign markets.
Anderson, who co-founded the company in 1996, plans to open an office in Russia after 2014. Six of the marketing staff of 25 to 30 people currently spend more than half the year in eastern Europe though none are based there, he said.
Ag Growth may expand further into eastern Europe with an acquisition, possibly in Turkey or the Ukraine after picking up dozens of closely held companies since its IPO, Anderson said. Future clip-on acquisitions will be in the range of C$20 million and “geographically driven to give us a more global footprint,” he said. Russia is off the table because it’s “impossible” to buy a company there, he said.
“We remain optimistic on Ag Growth’s medium- to longer- term growth prospects given our expectations of robust global demand for grain handling and storage equipment,” Robert Winslow, analyst at National Bank Financial, said in a March 14 note to clients. There is “continued strong demand in the Former Soviet Union region” and “the negative effects of the U.S. corn belt drought” are not expected again this year, he said.
Ag Growth rose 2.3 percent on March 22 to close at C$33.49 in Toronto, for a market value of C$420 million.
Laurentian Bank Securities upgraded the stock to buy and National Bank Financial raised it to sector perform, the equivalent of a hold, on March 15. EVA Dimensions upgraded it to underweight on March 21. The stock has three buys, six holds and one sell according to data compiled by Bloomberg, with a 12 month consensus price target of C$34.33.
Jeff Young, chief investment officer at NexGen Financial Corp., who manages about C$1 billion, held the stock until June when the U.S. drought cut the company’s profitability.
To win him back as a shareholder, the company needs to pursue markets abroad, Young said. “The more international expansion you get, the less dependent you are on crops or weather in any particular area,” Young said in a phone interview from Toronto on March 21. “It makes it a more stable company.”
Russia is an ideal target for expansion as farmers in the seventh-largest corn export market look for newer technology to store and handle grain, according to Spencer Churchill, analyst at Paradigm Capital Inc., who has a share price target of C$40.
“That’s an area of the world that is lacking in grain storage infrastructure,” he said in a phone interview from Toronto. Many producers “leave grain on the concrete, subject to the rain and spoilage because there’s just not enough storage.”
Investors are getting impatient waiting to see “significant” growth for the company in the former Soviet states, said Andrew Hamlin, who manages C$1 billion at Aston Hill Financial Inc. (AHF)
“I understand the opportunity that’s there, I just question how committed they are to really capture this market share by having a presence in Europe,” when the company doesn’t yet have an office in Russia or the Ukraine, Hamilton said by phone from Toronto March 21.
Ag Growth should retain its focus on the U.S. and Canada to increase its share price, Hamlin said.
To mitigate the risk of a high reliance on weather, the company may diversify into other agriculture equipment with a focus on spring seeding activity.
“It’s hard to sleep when you realize what’s going on here -- it’s been tough,” Anderson said. “We really like the focus of being an agriculture company only, but there’s ways of diversifying within agriculture and that’s probably what we’ll end up pursuing more.”
One of the “beauties of farming is that every spring optimism returns and they get back into the fields again,” he said.
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