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Viterra: Oversold Buying Opportunity

|Includes: Viterra Inc (VTRAF)
Canadian-based Viterra Inc (VTRAF.PK $7.18, VT.TO C$7.65) is the fifth largest global agri-business by market cap. Formally known as the Saskatchewan Wheat Pool, VTRAF’s business is sensitive to the weather, and Mother Nature recently has not been kind. Heavy rains this past spring will dampen harvest, reducing FY2010 and FY2011 earnings. The stock has sold off on this development, creating a buying opportunity for longer-term investors. 

Viterra owns an integral part of the grain transportation infrastructure in Canada, Australia, New Zealand and the Ukraine. In addition, VTRAF operates a chain of farm supply retail dealers in Canada and Australia, fertilizer plants, food processing plants for canola oil and malts, and feed processing facilities.

For more info on Viterra’s business structure and background, refer to my article Feb 9, 2010 -

Viterra’s grain infrastructure business (storage and transportation to port facilities) is based on volume and fee-based revenues. As the size of grain harvests increase, the needs for their services also increase. Likewise, lower harvests translate into lower revenue. Spring 2010 was overly rainy in Western Canada, its major market. The 5-yr average acres planted is about 60 million. Due to the wet spring, total acres planted are expected to drop to 50 million acres; 8 million that went unseeded and 2 million lost to wet conditions.

Management has estimated the reduced Canadian harvest will cut sales by 15% to 17% for fiscal year 2010 ending Oct 31. This decline reflects anticipated lower fertilizer and retail demand. Earnings estimates for FY2010 and FY2011 have been given a hair cut as well.

In Feb, the Street was looking for EPS of C$0.69 this year and C$0.81 next, on revenues of $9 billion. Current average estimates are for EPS of C$0.40 in FY2010 and C$0.61 in FY2011 on revenues of C$7.7 to C$8.1 billion.

Needless to say, the stock price has been hammered, especially in this weak overall market. 
Viterra currently trades at 1.03 times book value, and, while short-term challenges persist, the long-term story is still intact. Price targets have also declined, reflecting lower earnings. Most peg a reasonable stock price target at $10 for a 30% potential return, and I would agree. Viterra has many positives in its favor that are being overlooked by investors.

40% of company revenues are fee based infrastructure services that are hard to replace. VTRAF has an estimated 32% market share in its target growing regions. The economies of scale are important in negotiating rail costs, and VTRAF is the largest with the lowest cost structure. 

Viterra has the ability to better manage its acquired Australian assets and improving efficiencies will add to operating earnings. 

Cash flow is strong with depreciation write-offs exceeding maintenance capital expenditures. EBITDA is expected to grow from C$324 mil in FY2009 to C$480mil this year and C$556 next. If EBITDA grows to $600 mil in FY2012, 3-yr growth (2010-2012) would be a bit over 8%.

The balances sheet is conservatively managed with current net debt of C$835 million.

Management has been making smaller acquisitions in food processing, mainly in the US. 

Viterra is establishing a foothold in the canola processing market in China with a 51% interest in a new plant.

Growth in the Ukraine and a rebound in the Canadian markets should fuel better revenue years ahead. 

For investors looking for a mid-cap agri-business, Viterra’s opportunity should be reviewed. While shareholders have been feeling a bit of pain over the past few months, the growth opportunity going forward should reward patient investors. The second half of the year is historically better, and low share prices may not last much longer. Offsetting this will be poor YOY earnings comparisons as FY2010 may be lower than FY2009.

The latest company presentation dated 6/23:
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. 

Disclosure: Long VTRAF and have been a shareholder since 2009

Disclosure: Long VTRAF and have been a shareholder since 2009