Cost of equity assumptions
We apply our house approach to cost of equity calculation, summing up country risk (10Y government bond yield of 9%), an equity risk premium of 6% and company-specific premiums. Since farming is a classic commodity business with output prices more volatile than inputs, the minimum company-specific premium we see for the sector is 3 pp. To all companies covered in this report we add another 2pp to account for company-specific risks: Agroton (risk of use of proceeds), Industrial Milk Company (little track record, partial disclosure), KSG Agro (unclear strategy, little track record, risk of cost appreciation), MCB Agricole (risk of the majority shareholder change), Mriya (reliance on related parties) and Sintal Agriculture (negative track record).
Cost of equity by company |
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Source: Concorde Capital estimates |
Model assumptions
Company-specific assumptions and DCF output are given in the company profiles section of this report. Below are details of our approach to forecasting key operating parameters:
Landbank growth capped at 30%
We cap landbank expansion for all companies at 30% from current levels, assuming USD 400-450/ha cost of lease rights acquisition. For MCB Agricole, Sintal and Agroton, we assume close to zero landbank growth, as we believe MCB Agricole has no resources to expand while the latter two have recently expanded and will likely focus on integration, in our view.
Crop prices
We base our 2012 crop price forecasts on current market levels and apply 2% dollar inflation for future years.
Crop price base assumptions, USD/t |
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|
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
Wheat |
100 |
142 |
158 |
175 |
179 |
182 |
186 |
189 |
193 |
197 |
201 |
205 |
Corn |
117 |
150 |
142 |
167 |
170 |
173 |
177 |
180 |
184 |
188 |
191 |
195 |
Barley |
79 |
158 |
154 |
167 |
170 |
173 |
177 |
180 |
184 |
188 |
191 |
195 |
Rapeseed |
285 |
358 |
429 |
486 |
496 |
505 |
516 |
526 |
536 |
547 |
558 |
569 |
Soy |
350 |
333 |
317 |
398 |
405 |
414 |
422 |
430 |
439 |
448 |
457 |
466 |
Sunflower |
288 |
442 |
358 |
442 |
451 |
460 |
469 |
478 |
488 |
497 |
507 |
517 |
Sugar beet |
|
|
45 |
40 |
41 |
42 |
42 |
43 |
44 |
45 |
46 |
47 |
Source: APK-Inform, Concorde Capital
To these prices we apply company-specific premiums/discounts, largely based on historical selling prices in order to account for advantages due to ownership of storage facilities and/or higher crop quality.
Crop yield growth
We assume a 15% yoy decline in crop yields in 2012, as the positive weather effect of 2011 will likely disappear and cold weather during the winter will have some impact, and 10% growth in 2013 (except somewhat lower figures for rapeseed, sunflower and barley). For latter periods, we assume 2% growth per annum, though even this leaves grain yields far below EU levels.
Yield, t/ha Wheat |
|
Corn |
|
Sunflower |
|
|
|
|
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Source: Company data for 2008-11, Concorde Capital projections for 2012-2020 |
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