Crop structure
We base our forecasts for crop rotation on historical specializations, adjusting abnormally high shares of some crops (usually sunflower) and keeping (oilseeds + sugar beets)/grains ratio at 40%/60%.
Crop mix Agroton |
Industrial Milk Company |
KSG Agro |
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MCB Agricole |
Mriya |
Sintal |
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Source: Company data for 2008-11, Concorde Capital projections for 2012-2020 |
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Costs
We rely on company figures for historical costs/ha and apply the same dollar-based cost inflation to all companies. We see land lease expenses being the key cost driver in the nearest three years.
Cost growth assumptions, by component, in USD terms |
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2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
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Fertilizers |
5% |
-5% |
-5% |
4% |
4% |
4% |
4% |
4% |
4% |
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Plant protection |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
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Fuel |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
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Seeds |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
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Labor cost |
4% |
4% |
4% |
4% |
4% |
4% |
4% |
4% |
4% |
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Land lease expense |
33% |
20% |
17% |
7% |
3% |
3% |
3% |
3% |
3% |
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Other |
4% |
4% |
4% |
4% |
4% |
4% |
4% |
4% |
4% |
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Weighted average |
6% |
4% |
4% |
4% |
3% |
3% |
3% |
3% |
3% |
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Source: Concorde Capital
Revenue and gross profit, USD/ha, 2010 |
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2020E |
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Note: Revenue based on marketing years, gross profit based on company figures for cost/ha. Source: Concorde Capital estimates |
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Biological revaluation (ias 41) excluded
We adjust historical financial statements to exclude biological asset revaluation and remeasurement of agricultural produce (IAS 41). To accomplish this, we subtract revaluation components from both the top line (given in financial statements) and COGS (usually not given in audited financials, but provided by companies on request).
We believe there are two key benefits from adjusting financial statements in this fashion:
Cross-company comparability, as cost-basis statements make earnings comparable, unlike in unadjusted statements earnings largely depend on management assumptions
Historical basis for future margins projections. Because forecasting of future biological revaluation is inherently impossible, financial projections exclude revaluation. To compare future margins with historical figures, cost-basis numbers should be used since unadjusted figures do not shed any light on profitability in a particular year.
For details on our methodology for adjustments, please refer to Appendix T on pages TT-TT.
Government subsidies and taxes
We assume no change in the current zero VAT treatment of agricultural companies. VAT subsidies are booked on income statements as other operating income and its ratio to sales varies from company to company (the more the profitable company, the more the subsidy size). We use the average of the historical ratio of VAT subsidies to sales for projections.
Risks
Management credibility/Corporate governance
The inherent high dispersion in production processes in Ukrainian farming businesses over both space and time makes it impossible to check the veracity of key operating data, yields and costs applied, provided by management. This increases investors` (and auditors) reliance on management figures and thus makes credibility an important issue.
Commodity price volatility
As pure commodity producers, farmers are price-takers at the output level with all fluctuations of the price directly affecting their margins. Though around a half of inputs, namely seeds, fertilizer and plant protection, correlate with crop prices, we note a significant time lag between inputs use and crop harvesting. As to our knowledge, the use of forward sale and/or commodity price hedging is very limited among the listed farmers in Ukraine.