- •Investment Case 11
- •Valuation summary 37
- •Investment case 53
- •Investment Case
- •Companies Compared Stock data
- •Key metrics
- •Per ha comparison
- •Management credibility
- •Market Overview Summary
- •Ukraine in global context Ukraine produces 2-3% of world soft commodities
- •Sunflower oil, corn, wheat, barley and rapeseed are Ukraine’s key soft commodities to export
- •Ukraine is 8th in arable land globally
- •Key inputs used in crop farming Ukraine`s climate favorable for low-cost agriculture
- •Soil fertility map
- •Machinery use far below developed countries
- •Land trade moratorium makes more benefits
- •Fertilizer use
- •Inputs prices: lease cost is Ukraine’s key cost advantage
- •Case study: Production costs in Ukraine vs. Brazil for corn and soybean
- •Farming Efficiency Ukrainian crop yields lag the eu and us, on par with Argentina and Brazil, above Russia’s
- •5Y average yields, t/ha and their respective 10y cagRs
- •Yields at a premium in Ukraine on the company level
- •Growth Growth should come from yield improvement, crop structure reshuffle and acreage increase
- •Crop structure is gradually shifting to more profitable cultures
- •Combined crop structure of listed companies
- •Ukraine`s 2012 harvest outlook
- •Valuation
- •Valuation summary
- •Valuation summary
- •Asset-based approach
- •Asset-based valuation
- •Valuation premium/discount summary
- •Location matters: Value of land by region
- •Yields efficiency comparing to benchmark region
- •Cost efficiency
- •Adding supplementary businesses
- •Valuation summary for other assets
- •Cost of equity assumptions
- •Model assumptions
- •Landbank growth capped at 30%
- •Crop structure
- •Biological revaluation (ias 41) excluded
- •Land ownership
- •Company Profiles Agroton a high cost producer
- •Investment case
- •Valuation
- •Operating assumptions
- •Financials
- •Income statement*, usd mln
- •Agroton in six charts
- •Operati
- •Industrial Milk Company Corn story
- •Investment case
- •A focus on the corn explains high margins
- •Location favourable for corn
- •Well on track with ipo proceeds
- •Weak ebitda margin in 2012 explained by non-cash items
- •Valuation
- •Valuation
- •Operating assumptions
- •Financials
- •Income statement*, usd mln
- •Ksg Agro On the road to space/Not ready to be public
- •Investment Case
- •A 5x yoy boost in total assets looks strange to us
- •Valuation
- •Operating assumptions
- •Financials
- •Income statement*, usd mln
- •Ksg Agro in six charts
- •Mcb Agricole Acquisition target with lack of positives for minorities
- •Investment Case
- •Inventories balance, usd mln
- •Overview of acquisitions of public farming companies in Ukraine
- •Valuation
- •Operating assumptions
- •Financials
- •Income statement, usd mln
- •Mcb Agricole in six charts
- •Mriya Too sweet to be true
- •Investment Case
- •Valuation
- •Operating assumptions
- •Financials
- •Income statement*, usd mln
- •Mriya in six charts
- •Sintal Agriculture
- •Investment Case
- •25% Yoy cost reduction in 2011 should improve margins
- •Irrigation is a growth option
- •Inventory balance, usd mln
- •Valuation
- •Valuation
- •Operating assumptions
- •Financials
- •Income statement*, usd mln
- •Sintal Agriculture in six charts
- •Astarta Sugar maker
- •Kernel Grain trader actively integrating upstream
- •Poultry producer
- •Appendices Land value
- •Current landowner income capitalization model
- •Farmer income capitalization model
- •Normative value
- •Biological asset revaluation
- •How do we adjust the income statement to be on a cost basis?
- •Ias 41 application summary
- •Appendix: Crop production schedule Crop schedule, based on 2012 harvesting year
- •Investment ratings
- •Contacts
A 5x yoy boost in total assets looks strange to us
KSG Agro reported that total assets increased to USD 123 mln at the end of 2011 from USD 26 mln a year ago, according to the non-audited balance sheet released by the company in mid May. The growth was primarily driven by increase in the book value of PP&E and reported goodwill from acquisitions. We believe this asset growth hardly represents a real growth in the company’s size over period (landbank growth was below 2x yoy and non-acquisition capex were minor) and note that this poor reporting practice could be behind the company’s ongoing dispute with its auditors, who still have not signed KSG Agro’s report for 2011.
Secured PLN 75 mln in equity financing
KSG Agro has announced on April 26 that it agreed for equity financing from GEM Global Yield Fund Limited for a total amount of up to PLN 75 mln; the underlying share price has not been disclosed. KSG Agro has an option to issue new equity for any amount of this sum within three years and has to pay a lump sum commitment fee of PLN 1.5 mln and additionally issue two share options for a 5% stake each with strike prices of PLN 35 and PLN 40 per share (vs. current of PLN 17.5). While this financing option clearly adds flexibility for possible acquisitions, the non-disclosure of the underlying share price makes it impossible to assess the impact on other minority shareholders. Assuming a share issuance at the market price, it would dilute current share capital by 23%.
Low upside is not sufficient to consent to the associated risks; HOLD
We set our 12M target price for KSG Agro at USD 8.0 (PLN 27.9) per share, applying equal weights to our asset base model (target EV of USD 1,830/ha for KSG Agro’s land plus USD 18 mln for its processing business) and DCF (USD 7.8 per share fair price at WACC of 19-20%). With upside of 61%, we assign a HOLD recommendation to the stock due to the multitude of risks associated with the company.
Risks: Ability to keep costs low is key
KSG Agro’s ability to keep costs low is a crucial risk, as its cost-advantage is the key reason why we value KSG Agro at a premium on EV/ha. Management accountability is the second most important risk, as its growth strategy does not match its balance sheet, in our view, and it is expanding in very different directions, making it hard to predict the overall result. Its high concentration in one region also adds some weather risk, which is especially important for fast growing companies like KSG Agro. Poor land treatment, visible in the especially high share of sunflower in its crop rotation (each plot was cropped at least 1.5x times with sunflower on average over the last four years) poses a risk for future crop yields fall. In addition, KSG Agro has some of the poorest reporting and disclosure practices in the sector.
Valuation
We use DCF as a 50% input to our target price. Our model shows a fair stock price at USD 7.8 per share (PLN 27.3); upside of 30%. For detailed operating assumptions, please refer to the next page.
DCF output, USD mln
|
2011E |
2012E |
2013E |
2014E |
2015E |
2016E |
2017E |
2018E |
2019E |
2020E |
||||||||
EBITDA |
12 |
17 |
23 |
27 |
28 |
30 |
31 |
33 |
35 |
37 |
||||||||
EBIT |
10 |
14 |
18 |
22 |
23 |
24 |
25 |
27 |
28 |
29 |
||||||||
Effective Tax Rate |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
||||||||
Taxed EBIT |
10 |
13 |
18 |
21 |
22 |
24 |
25 |
26 |
27 |
29 |
||||||||
Plus D&A |
2 |
4 |
5 |
5 |
5 |
6 |
6 |
6 |
7 |
8 |
||||||||
Less CapEx |
(17) |
(19) |
(13) |
(5) |
(3) |
(4) |
(5) |
(6) |
(7) |
(8) |
||||||||
Less change in OWC |
(5) |
(6) |
(6) |
(4) |
(1) |
(1) |
(1) |
(1) |
(1) |
(1) |
||||||||
FCFF |
- |
- |
4 |
17 |
23 |
24 |
25 |
25 |
26 |
27 |
||||||||
WACC |
20% |
20% |
19% |
20% |
20% |
20% |
20% |
20% |
20% |
20% |
||||||||
Sum of disct'd CF's |
|
|
77 |
|
|
|
|
|
|
|
||||||||
Terminal Value |
|
|
|
|
|
|
|
|
|
171 |
||||||||
Disct'd TV |
|
|
44 |
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||
Firm value |
|
|
121 |
|
Portion due to TV |
|
|
36.3% |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||
Less Net Debt |
|
|
(5) |
|
|
|
|
|
|
|
||||||||
Equity Value as of 25 May 2013 |
|
117 |
|
Implied exit EBITDA Multiple |
|
4.6 x |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||
Perpetuity Growth Rate |
|
|
|
|
|
|
|
|
|
3.0% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fair price of ord. share |
|
USD 7.8 |
|
|
|
|
|
|||||||||||
|
|
PLN 27.3* |
|
|
|
|
|
|||||||||||
* At PLN/USD rate of 3.50 as of May 23
Source: Concorde Capital estimates
Sensitivity analysis, PLN per share
|
Perpetuity Growth Rate |
|
|
Exit Multiple (EBITDA) |
|||||||||||
|
2.0% |
2.5% |
3.0% |
3.5% |
4.0% |
|
|
2.6 x |
3.6 x |
4.6 x |
5.6 x |
6.6 x |
|||
WACC |
|
|
|
|
|
|
WACC |
|
|
|
|
|
|||
-3.0% |
30.7 |
31.1 |
31.5 |
32.0 |
32.5 |
|
-3.0% |
26.1 |
28.8 |
31.5 |
34.2 |
36.9 |
|||
-2.0% |
29.3 |
29.6 |
30.0 |
30.5 |
30.9 |
|
-2.0% |
25.0 |
27.5 |
30.0 |
32.6 |
35.1 |
|||
-1.0% |
27.9 |
28.3 |
28.6 |
29.0 |
29.5 |
|
-1.0% |
23.9 |
26.3 |
28.6 |
31.0 |
33.4 |
|||
+0.0% |
26.6 |
27.0 |
27.3 |
27.7 |
28.1 |
|
+0.0% |
22.9 |
25.1 |
27.3 |
29.5 |
31.8 |
|||
+1.0% |
25.4 |
25.8 |
26.1 |
26.4 |
26.8 |
|
+1.0% |
21.9 |
24.0 |
26.1 |
28.2 |
30.3 |
|||
+2.0% |
24.3 |
24.6 |
24.9 |
25.3 |
25.6 |
|
+2.0% |
21.0 |
23.0 |
24.9 |
26.9 |
28.8 |
|||
+3.0% |
23.3 |
23.5 |
23.8 |
24.1 |
24.5 |
|
+3.0% |
20.2 |
22.0 |
23.8 |
25.7 |
27.5 |
|||
Source: Concorde Capital estimates
WACC decomposition
|
2011E |
2012E |
2013E |
2014E |
2015E |
2016E |
2017E |
2018E |
2019E |
2020E |
Debt-to-Equity |
0.12 |
0.09 |
0.12 |
0.10 |
0.09 |
0.08 |
0.09 |
0.09 |
0.09 |
0.09 |
Avg. after-tax Interest Rate |
18.0% |
18.0% |
15.0% |
15.0% |
15.0% |
15.0% |
15.0% |
15.0% |
15.0% |
15.0% |
Ukr. Eurobonds YTM |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
Equity premium |
6.0% |
6.0% |
6.0% |
6.0% |
6.0% |
6.0% |
6.0% |
6.0% |
6.0% |
6.0% |
Comp.-specif. prem. |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
Cost of Equity |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
WACC |
19.8% |
19.8% |
19.4% |
19.5% |
19.5% |
19.6% |
19.6% |
19.6% |
19.5% |
19.5% |
WACC to Perpetuity |
19.5% |
|
|
|
|
|
|
|
|
|
Source: Company data, Concorde Capital estimates