Formally known as the Saskatchewan Wheat Pool, Viterra Inc (VT.TO - C$9.50, VTRAF, VTRAF.PK - US$8.78) is an emerging Canadian-based grain infrastructure company that is poised to capture a bigger piece of the expanding Asian agricultural grain import market. Two of the largest grains producing areas are Canada and Australia.
Combined, farmers in these growing regions produce 37% of the world’s exports of wheat, barley, and canola, compared to 34% for the US. Asian imports of these commodities are expected to grow by approximately 4% annually for the next 10 years. While many on the Street presently rank Viterra as a “market perform”, the current share price should be attractive for long-term investors looking to diversify into the consumer/food/agricultural commodity sector, and especially for US investors looking to increase international exposure. VT has built a market-leading position in many of its niche businesses, and is the fifth largest global agri-business by market cap, with estimated FY2010 revenues of C$9 billion.
Ever wonder how grains such as wheat move from markets where it is grown and in abundance to markets where it is in demand? Viterra focuses on providing the infrastructure to facilitate the marketing and transportation of grains, specifically wheat, barley, oats, and canola, from Canada and Australia to overseas markets, such as Africa and the Middle East, South America, and Asia. The recent purchase of a large grain handler in Australia (ABB) has expanded VT’s opportunities, but has also provided some growing pains. As an integrated middle-man in the movement of basic agricultural commodities, VT’s market will continue to grow and offers management the prospect of greater capitalization of their assets. VT can be broken down into three segments: Grain Handling and Marketing, Agri-Products, and Agri-Food and Feed Processing. Grain handling represents about 46% of EBITA, with agri-products around 25%, and food and feed processing around 29%.
Grain handling involves the marketing, transportation, logistics, and storage of grains. It is a basic fee-for-services business model. Viterra is the largest Canadian grain handler with a 45% market share, operating six large port facilities, including Prince Rupert (west) and Thunder Bay (east), along with 85 grain elevators. Coordinating large rail shipments from its grain elevators to its export terminal services provides VT with a strong market advantage that translates into higher inventory turns and better cash management. It is anticipated the newly acquired Australian assets will benefit from a similar approach.
Agri-products include a large chain of farm retail stores, both in Canada and newly acquired in Australia. It is expected that the Aussie retail business will generate improved margins from a restructuring along the lines of their Canadian brethren. Viterra also owns fertilizer plants in Canada and Australia, and produces proprietary seeds.
Agri-processing comprises of malt, oats, canola, and animal feed processing. The combination of Joe White (Australia) and Prairie Malt (Canada) creates one of the world’s largest malt suppliers to the beer industry. VT is also a major oats and canola processor globally. Feed production in Canada, the US, and New Zealand offers a stable business as it takes about 8 lbs of feed to produce 1 lb of beef, with global demand for feed grain growing by around 2% to 3% a year.
The acquisition of Australian ABB has provided challenges to management that will take time to resolve. For example, there were financial issues concerning violations with ABB’s debt covenants immediately after the merger that were quickly resolved. Viterra is in the process of rebranding ABB assets and realigning their business structure. As the restructuring of the Australian business takes hold during the next 24 months, management can begin to turn its attention to additional acquisitions.
FY Oct 09 eps were C$0.45 on revenues of C$6.6 bil, down from C$1.31 eps in FY08, as the global economic slowdown put pressure on margins and FY08 was a record year for performance. The integration of the Australian assets should expand FY2010 revenues to over C$9 bil and generate consensus earnings of C$0.69 this year and C$0.81 next year. However, within this consensus, there are substantial differences based on the perceived performance of the Australian acquisition and overall agriculture commodity market conditions, with the recent trend being a reduction of earnings estimates. Keep in mind that the majority of VT’s earnings are realized in the fiscal 3th quarter with an estimated 65% of EBITA generated during the fiscal second half. As an agri-business, VT’s fortunes are directly tied to the variables of agriculture, such as crop size and weather, making projections somewhat difficult.
Viterra has a solid balance sheet. As of FY Oct 09, cash and short-term investments totaled C$1.033 bil and total debt stood at C$1.575 bil. The company recently paid off C$300 mil of short-term acquisition financing and look for management to further reduce total debt to a more manageable C$1.0 bil over the next few years. Lower interest expense could add slightly to eps growth.
Viterra provides investors with the opportunity to diversify into the agri-business sector, with a focus on increasing demand for grain exports/imports. While the sector has historically been considered as a steady and defensive investment, VT offers interesting growth and acquisition potential. In addition, because the vast majority of its assets are in Canada and Australia, VT offers unique exposure to international, or non-US, assets.
The current stock weakness should offer investors with attractive long-term capital gains potential, but patience will be required. My personal price target over the next 12 to 24 months is C$12, US$11.50, or 15 x FY2011 estimates, with much of the capital appreciation coming in 2011 as VT continues to improve acquisition profitability. If management can increase gross margins from the Australia acquisition at a faster pace, subsequent Wall Street upgrades will improve share performance. Likewise, a shortfall will compress share prices downward. Viterra is worthy of further due diligence and a great place to start is the corporate overview from the investor section of their website (.pdf).
Disclosure: Long VT and have been a shareholder since 2009
