Viterra: Oversold Buying Opportunity

Jul. 19, 2010 1:32 AM ETVTRAF
George Fisher profile picture
George Fisher's Blog
5.44K Followers
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Utilities, Industrials, Value

Contributor Since 2012

I am the author of Guiding Mast Investments monthly newsletter, focused on timely dividend paying stocks. Our mission at Guiding Mast Investments is to help investors keep a steady pace of wealth accumulation as they navigate through their financial voyage.  I have been a Registered Investment Advisor, financial author, and entrepreneur. I bring a variety of expertise to my clients, from personal investment planning and management to stock market analysis skills. I am the creator of the late 1990s investment newsletter Power Investing with DRIPs focused on timely selections of dividend paying stocks. I have also published two books through McGraw Hill, All About DRIPs and DSPs (2001), and The StreetSmart Guide to Overlooked Stocks (2002). My work experience covers a variety of fields.Prior to being a RIA, I spent 15 years as a corporate manager at Georgia-Pacific Corp before venturing out on my own, operating several businesses from manufacturing to export marketing management. President Ronald Reagan appointed me to the National Advisory Council overseeing the Small Business Administration from 1988 to 1991.


Now comes the obligatory disclaimers: The opinions and any recommendations expressed in this commentary are those of the author . None of the information or opinions expressed in this article constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this commentary constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. The information contained in this report does not purport to be a complete description of the securities market, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and subject to change without notice. Either Mr. Fisher or his employer, if any, may hold or control long or short positions in the securities or instruments mentioned.

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 - https://seekingalpha.com/article/187473-viterra-poised-to-capture-bigger-piece-of-asian-grain-import-market

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: http://www.viterra.ca/portal/wps/wcm/connect/089fa380430b179bbc2cbfd0f78540e0/June+21-22_10.pdf?MOD=AJPERES&CACHEID=089fa380430b179bbc2cbfd0f78540e0
 
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

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.