Investment case

We initiate coverage on Industrial Milk Company (IMC PW) with a BUY recommendation and 12M target price of PLN 17.5 per share, implying an upside of 76%. We like IMC`s location, operating efficiency, focus on higher-margin corn and execution of IPO commitments, while at the same time we are somewhat concerned on the future ability to achieve selling price premiums.

A focus on the corn explains high margins

Around of the half of the IMC`s acreage was devoted to the corn cultivation during the last four years and company devoted 54% of the land in 2012 for this crop. A focus on the corn pay backs: prices for the corn are comparable to the wheat, but yields per ha were 1.6x higher for corn that for wheat (Ukraine`s average for five years), more than compensating for the higher required costs. IMC posted the highest corn yields among listed pure farmers: 5.9 t/ha in 2010 and 8.0 t/ha in 2011. Thanks to that IMC earned the highest gross profit per ha of USD 750/ha, we estimate.

Location favourable for corn

We find the location of IMC`s landbank (roughly equally split over Poltava, Chernihiv and Sumy regions) as the best among listed pure farmers if measured by average profit per ha (see our Valuation section for details). While Poltava region delivers premium yields for most of crops grown in Ukraine, Chernihiv region is favourable for corn and potatoes production. Sumy region`s yields are similar to Ukraine averages while crop structure is slightly shifted to the corn.

Corn yields, mt/ha		Sunflower yields, mt/ha		Wheat yields, mt/ha
Source: Concorde Capital estimates		Source: Concorde Capital estimates		Source: Concorde Capital estimates

A high-cost-high-yields producer

IMC applies the highest per ha costs among Ukrainian listed pure farmers, achieving the highest revenues from the hectare. This bodes into well-paid strategy with estimated gross margin of 56%-57% in 2010-11.

The ability to keep efficiency is yet to see

IMC expanded its landbank from 38 ths ha from IPO in April 2011 to 83 ths ha as of May 2012, the fastest post-IPO growth within a year among Ukrainian companies. We yet to see whether the company will be able to show the similarly high crop yields on acquired land as it posted on the old land.

Self-sufficient in storage

The company’s storage facilities amount to 303 kt, 1.1x above the total crops we expect company to harvest this year and second-highest absolute figure among listed pure farmers.

The ability to keep high corn selling price is questionable

IMC derived 3/5 of its revenues in 2011 from the sale of corn, which company was able to deliver at average price of USD 263/t, or 1.9x higher than what we calculate was the selling price for an average farmer. The company explains the premium by the fact that corn contract terms were agreed on the forward basis and company executed delivery to the port. We treat this price as one-off and expect the sale terms to converge to market averages plus 10% (premium justified by the presence of the own storage facilities).