Well on track with ipo proceeds

We deem IMC post-IPO development as one of the most successful among Ukrainian farming companies and well consistent with its pre-IPO commitments.

Pre-IPO intentions Targeted USD 83.4 mln in proceeds at the maximum price	Post IPO Net proceeds of USD 24.4 mln
Intended use of proceeds	Post-IPO developments
88 ths ha landbank increase	45 ths ha landbank increase
Construction of 80 kt potato storage facilities	13.5 kt potato storage constructed
Construction of 130 kt grain storage facilities	131 kt grain storage facilities acquired
Investments in machinery & equipment	USD 9.1 mln cash outflow in PP&E within 2Q11 – 1Q12 (includes potato storages)
Working capital	n/a

Source: Company data, Concorde Capital calculations

Weak ebitda margin in 2012 explained by non-cash items

Industrial Milk Company posted 20% EBITDA margin in 2012, net of biological revaluations, 25pp down yoy. The most of decline is explained by non-cash items in other operating loss line: (1) impairment of the fair value of agricultural produce (which is a non-cash item purely due to the fact that agricultural produce was booked at market prices at the moment of harvesting and prices has decreased until the year end) and (2) lower VAT grants in 2012 due to the management decision to postpone sales to 2012 (where we expect the company to receive respective VAT grants). A 16% yoy drop in revenues in 2012 is purely explained by management decision to postpone sales of majority of 2011 harvest crops to the next year (only 1/3 of corn harvested in 2011 has been sold).

Key financials, USD mln

	2010	2011	2012E	2013E
Revenue	34.8	29.1	63.6	90.9
yoy	72%	-16%	119%	43%
Gross profit	17.4	13.5	36.2	44.7
mgn	50%	46%	57%	49%
EBITDA	15.6	5.7	32.1	39.2
mgn	45%	20%	50%	43%

Note: All figures are net of remeasurement of agricultural produce and revaluation of biological assets

Source: Company data, Concorde Capital projections

Valuation

We rate IMC as BUY with 12M target price of PLN 17.5/share, an upside of TT%, based on 50/50 blend of DCF and asset-based valuation. The stock is undervalued both by DCF model (implied fair value of PLN 15.2/share at wacc of 19%) and asset-based valuation (PLN 22.2/share at target EV/ha of USD 2,300/ha and USD 55 mln for complimentary business).

Risks

The ability to integrate doubled landbank without margin destruction is a key risk for the company. Other risks include ones applicable to all companies in the universe: poor liquidity, reliance on commodity prices, regulatory changes.