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"Walking the world for knowledge and opportunities; uncovering ideas others neglected, wrongly rejected or simply ignored." I am a professional investor interested in global investment opportunities with more than seven years experience in Long/Short and Event Driven, MBA in Finance... More
  • BayWa AG: Going Global In Agribusiness  0 comments
    Sep 27, 2013 12:20 PM

    BayWa AG (Ticker: BYW6 GR) is a german agribusiness company with a strong foothold in the cooperative sector in Central Europe. The company's business combines commodity trading, logistics and services for agricultural, building materials and energy products. BayWa AG operates with owned infrastructure close to its major customer groups farmers and small-medium sized enterprises in rural areas.

    The company was founded in 1923 and up to 2012 it was generating around 88% of its revenues in Europe (62% Germany and 26% Austria) and 12% in Eastern Europe. BayWa operates in both the retail and wholesale segments being involved in three different business niches:

    1. Agricultural products: Both Cefetra and Bohnhorst acquisitons are to be a milestone for BayWa AG as Agricultural activities is definitely to take the helm grossing by more than 70% Revenues and 60% of EBITDA of the company. Basically the firm extends its activities as agro product supplier to the food processing industry, construction of agricultural facilities, farming/agricultural machinery along with fertilizer, pesticides along with other related products plus farming counselling services. The company is one of the ten largest agricultural traders worldwide, being also the largest supplier of pome fruit to German retailers and is active in global fruit trading via its holding in New Zealand's Turners & Growers. The company does not provide any guidance here due the high seasonality and difficulty in predicting grain prices as well as fertilizer and related products costs.
    2. Building and construction-related products: BayWa AG has focused its activities on Wholesale Building materials business (10% Rev, 8% EBITDA) - where it is ranked number 2 in Germany - after disposing of its retail franchise "Do-it-Yourself" in 2011. The company has tried to turnaround this business in past without success and recent M&A focus on agriculture and renewables might come with BayWa's intention to dispose of this business segment in the future.
    3. Energy: BayWa AG is involved in traditional (20% Rev, 9% EBITDA) and renewal energies (4% Rev, 15% EBITDA). The former has to do mainly with the sale of heating oil but also fuels and other lubricants as BayWa operates around 275 gas stations in Germany under the name BayWa and AVIA; whereas it has 500 stations in Austria branding itself as GENOL. BayWa has established itself in strategic growth markets through the acquisition of companies in the areas of wind, solar power and biomass in the US, France and Spain.

    Game-changer M&A: Acquisitions of Cefetra and Bohnhorst

    BayWa AG has been very active in acquiring small and medium businesses throughout its life span but 2012 marked a milestone in acquisitions that also has provoked an increase in leverage. In this way, BayWa has evolved from a European into a global agricultural trading company as the acquisitions of Turners& Growers, Cefetra and Bohnhorst will enable BayWa to increase its international footprint substantially with Agriculture-related activities now being the company bulk of revenues (more than 70% sales against prior 48%):

    1. Cefetra (Rev 4.6 Bn EUR): Netherlands-based globally active services, logistics and agricultural trading company with access to already-completed grain harvests in the Southern Hemisphere.
    2. Bohnhorst (Rev 470 Mill EUR): Agricultural trader with international activities that has excellent infrastructures and also deals in the fertiliser and feed sectors.

    BayWa AG Agriculture activities are to weight more than 70% Rev

    Stock Key Drivers

    SWOT Analysis

    Strengths

    • USP: Customer proximity through full-coverage network for sales and logistics, especially after the last two acquisitions.
    • Leader in Crop protection product distribution (Germany) and Top 10 world agricultural traders.
    • Strong position in Heating Oil trade: Largest in Southern Germany and Top Five in Austria
    • Economies of Scope: Nearly complete coverage of the agricultural value chain.
    • Geographic stronghold in Germany and Austria with worldwide expansion starting in 2013.

    Weaknesses
     

    • Agriculture exposure is to be almost 70% of FY13 revenues against half in FY12m, which plays down in importance Energy and Building businesses
    • Agricultural business and Renewable Energy businesses hinges significantly on European subsidies
    • M&A Intensive activity complicated decision-making process and strategy execution
    • Large inventories are usual in Q3 (after harvest) and 1Q ahead (sowing season) sometimes may create inventory overhang and margin pressure.

    Opportunities

    • By 2050, the world's population will grow by another 2 billion, reaching 9 billion people and increasing prosperity in EM is leading to changes in eating habits and increasing demand for food.
    • Agricultural business hinges significantly on European subsidies
    • Internationalization of business: Chile, USA, China, Australia, Fiji and New Zealand.
    • 2013 Fertilizer cost drop, especially expected weakness in Potash, could benefit margins
    • 1H13 German construction weakness justified by weather conditions (flood damage) and could resume in 2H13
    • Oversupply in grain commodities, wheat especially, is to play an significant role in 2014 if volumes gains offset a decline in grain prices.

    Threats

    • Germany and Austria are still important so economic weakness in Core Europe is to be felt by BayWa AG.
    • Agricultural demand elasticity is to be rather low, yet the Energy business is seasonal while building cyclical bias is evident.
    • M&A integration as synergies and effective strategy execution are to pass the acid test in 2013 and 2014.
    • Oversupply in grain commodities, wheat especially, is to play an significant role in 2013 were prices to fell more.
    • Oversupply in grain commodities, wheat especially, is to play an significant role in 2014 if volumes gains cannot offset a decline in grain prices.

    Business and Financial Main Takeaways:

    Strategy: Baywa AG is going big via M&A as the company tries to override geographic boundaries extending its footprint in the agricultural trading business as well as increase its market power in the European soft commodity trading and distribution business. Cefetra and Bohnhorst transactions were under the scrutiny of the EU Antitrust commission but received approval in late 2012. Personally speaking, I expect the company to take advantage of an expected strong activity in its building materials business in 2H13 - suffering of low investments in housing and decreasing government subsidies- as to dispose of this troubled segment, repay part of its debt and focus on the Agricultural and Energy segments.

    Momentum: First half of 2013 operating performance has been positive even after adjusting for one-off effects (sale of three real estate packages) with EBIT coming to 101 million EUR and CEO raising guidance on a qualitative basis. The long winter and rainy spring, boosted fertilizer consumption more than usual plus wet weather continuation into April and May put crops at a risk of pest infestation, which led to greater sales of crop protection.

    BayWa AG business margins are low but pretty stable

    M&A Profitability: BayWa AG has been divesting in Real Estate and Building Materials, among others, to focus on acquisitions in the renewable and agricultural business. Although difficult to measure, top management seems so far to have hit the jackpot as business margins have expanded and the economic value spread has gone from negative to positive territory. In other words, BayWa AG is focusing and allocating CapEx and M&A efforts in those niches it expects to be profitable. In line with this past track record, we consider the last two movements will also be earnings-accretive as cheap deal multiples suggest: Cefetra deal EV-to-EBIT of 14x and 6.5x for Bohnhorst deal as similar deals in the space have priced offers around 15.1x.

    M&A Analysis: BayWa AG has paid reasonable multiples

    Financial Soundness: Baywa Ag acquisition rush over the last couple of years has come with additional 265 Mill EUR leverage. Net Debt as of 1H13 is 1.46 Bn EUR or 3.95x T12M EBITDA. To be fair, liquidity ratios have improved and Cefetra and Bohnhorst cash flow contribution is not to be felt until 3Q13 or 4Q13, for which reason credit metric metrics are to improve substantially.

    BayWa AG financial leverage has increased on M&A

    But Asset Turnover has also contributed to ROE

    Cheap Valuation: BayWA AG shares are pricing relative cheap figures on a historical and relative basis. In this way, Trailing 12M Price-to-Earnings ratio is around 8.3x far below from 22x 2003-2013 historical average. Furthermore, Relative Price-to-Earnings (MDAX as benchmark) ratio is also quite luring at 0.59x when comparing it to the historical 1.45x. Peer comparison is not feasible due to the lack of public-listed companies with similar business mix to BayWa AG. For illustration purposes, drilling into GICS classification we can find European firms in the same sub-industry (Trading Companies and Distributors) pricing a median 13.8x T12M PER ratio. Better yet, when classifying companies in quintiles by ROE Baywa turns out to be rather cheap offering relatively higher ROE (16.9% vs 12.5%Median) at a cheaper PER multiple (8.5x 11.7x).

    BayWa AG historical and relative valuation is compelling

    Valuation:

    We slice & dice BayWa business using a SOPT model. First, we value the core business using FCFF model to work out a valuation for its Agriculture business. Secondy, we conduct a peer relative valuation (using EV-to-EBITDA and EV-to-EBIT with european and gloval peers playing in the same GICS sub-industry) for valuing Energy and Building materials businesses as we consider BayWa aim is to dispose of both in the medium to long term horizon:

    Sensitivity Analysis

    BayWA AG Agricultural business FCFF projections have been constructed using different assumptions, yet the main important were those related to sales growth and operating margin. In this way, the base scenario is based on BayWa´s five-year growth of 3% (vs 4-4.5% Sell-Side) and Agriculuture NOPAT margin of 1.5%, which is in line with expected range from 1% to 2%,. Nevertheless, a long term earnings normalization assumption is introduced after 2018 assuming a terminal growth rate of 1.5% and initial WACC of 8%:

    BayWa AG: Investment Case

    BayWa AG stock price is +14% YTD but still offers additional upside as the company transformation becomes evident before investors's eyes in late 2013. Our baseline scenario assumes a conservative range of inputs plus a BayWa AG's stock cheap valuation and optimist agribusiness prospects in the coming months as BayWa AG acquistions are to hit the consolidaded statements substantially encourages to think that BayWa's leverage increase will be tackled as consolidated cash flows are considered - so far only 1 semester consolidated so trailing 12-month credit metrics are misleading.

    Overall, Bohnhorst acquisition helps BayWa to extend its position as a European grain dealer while Cefetra represents an important step to further internationalise its business besides improving horizontal integrations and helping Baywa AG to become one of the largest soft commodity trader globally. Indeed, current valuation levels are far from reflecting all this facts.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Data Source: BayWa AG and Bloomberg

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