AG Growth International Is Your Safest Bet In The Agricultural Sector

| About: AG Growth (AGGZF)

Summary

Banking on grain volumes instead of prices.

A growing international presence is reshaping the company.

The effect of the recently completed Westeel acquisition.

Temperatures are rising and the sun is shining and that means one thing for thousands of people across North America, harvest is coming! For investors there are several was to invest in agriculture, some go for heavy equipment, others may go the commodity futures market. Then you have a company such as AG Growth International Inc. (OTCPK:AGGZF), which specializes in storage and handling products for both local farmers and large commercial operations. This includes items such as 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.

Founded in 1996 in Winnipeg, Manitoba, AG Growth offers investors less glamour in its product line than say John Deere (NYSE:DE) or the like, but its products are less capital intensive for their customers. Items such as storage facilities and augers are easier for AG Growths customers to justify buying in a rough year than a $2 million combine would be. Then you also have AG Growths commercial and industrial clients which include corporate farms, processors and commercial grain handling operations, this leaves AG Growth ample opportunity to profit from all across the agricultural landscape.

Reaping revenues in Q1 2015

The company has for the most part been growing its revenue stream in the past few years, but its last quarter left some disappointed. Revenues (called trade sales in report) dropped to C$21.7 million from C$23.1 million during the same period last year. The drop in revenue has been completely attributed to AG Growth's shuttering of its OEM division, while the loss in revenues has been justified the lack of organic growth and limited adjustments from a weaker Canadian dollar is concerning.

Adjusted EBITDA rose to C$16.4 million from $14.4 million and at the bottom line fell to a net loss of $3.4 million (C$0.26 per share) from a net income of C$1.2 million (C$0.09) in Q1 2015. This loss follows the 2014 year end net loss of C$19.4 million, in terms of EPS this loss came in a C$0.27 per share far from the analysts' estimates of C$0.45. Some bright spots from the quarterly report were that AG Growth managed to increase its gross margin from 36.5% to 35.1%.

While AG Growth may have begun its existence in humble Winnipeg, Manitoba it has grown exponentially worldwide, this is especially true for the company's operations in the United States. In the last quarter C$49.7 million or just over half of AG Growth's revenues came from the U.S. and C$21.7 million coming from Canada. This leaves C$22.8 million in revenues coming from its international operations, 52% of this international revenues came from the RUK trade block (Russia, Ukraine and Kazakhstan) thanks predominantly to a new grain port project in Ukraine which has yet to be affected by Russian backed separatists in the East. This region (mostly Ukraine) also makes up 59% of AG Growths international order backlog of C$32.7 million. AG Growth's other key region for international growth is in Latin America which contributed to 18% of international revenues last quarter, and 34% of the current order backlog.

The recently completed Westeel acquisition

While the international growth is comforting the biggest boost to AG Growth's stock in the next year will be based on the recently completed acquisition of Westeel. Back in November of 2014 AG Growth announced that it would be purchasing Westeel from struggling Vicwest Inc. (OTC:VICUF) for C$221 million. This acquisition is a natural fit for AG Growth as Westeel also produces agricultural storage units for both farm and large commercial use. This will also add a customer base comprised of 30 countries and international offices in Mumbai and Madrid to AG Growth's portfolio.

One of the more immediate impacts AG Growth should experience from this merger is its increased market share in Western Canada. This is significant as in the past couple of years the region has had back to back record crop yields which has overflowed existing infrastructure. Then there is the new reality of the end of the Canadian Wheat Board's monopoly on wheat and barley. The end of the monopoly has opened up the markets to new players looking to buy and ship grain from the Canadian Prairies and opens up the opportunity for AG Growth to secure several large commercial orders.

The acquisition of Westeel will also balance out where AG Growth generates revenues from, and makes it less susceptible to regional crop failures.

Pre-acquisition

Post-acquisition

Canada

26%

44%

United States

55%

39%

International

19%

17%

In terms of the bottom line Westeel produced an adjusted EBITDA of C$20 million in 2014, compared to AG Growth's EBITDA of C$78 million in 2014. If we were to combine the companies' 2014 revenues we would have total revenues of C$580 million which is a pro forma increase of 44%.

Harvest is coming, for investors

The acquisition of Westeel should go a long way to boosting AG Growth's stock price in the coming year, as investors are expected to be impressed by the added revenues from Westeel. There is also a belief that this acquisition will lead the company to raise its dividend for the first time since 2010, the dividend current has an annualized payout of C$2.40 with a yield of 4.82%.

On the OTC AG Growth closed on June 10 at $40.76 with a 52 week range of $38.04 to $49.15, while on the TSX the stock closed at C$49.75 with a 52 week range of C$41.45 to C$57.99. With the acquisition now complete and a good growing summer being predicted the average price target on the TSX shares has now climbed up to C$57.30. If you're looking for a steady and stable agricultural stock which is more dependent on crop volumes rather that prices AG Growth just may be worth a closer look.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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