Investment Case

We initiate coverage on MCB Agricole (4GW1 GR) with a HOLD recommendation (TP of EUR 0.5/share) prompted by the high risks associated with the stock and low profitability of its operations. Though our asset-based valuation shows a significant upside to MCB Agricole`s current market price, we believe the current management is not willing or able to realize this potential as the company has had low profits for a long period and we have not seen efforts to turn things around. This makes MCB Agricole a clear acquisition target, with subsequent high risks for minorities.

Average company by all means

With 90 ths ha spread across 13 regions of Ukraine, MCB Agricole is a close approximate to the average Ukrainian agricultural company in terms of operating efficiency. We find its land’s average profitability per ha level is very close to that of all Ukraine, while it posts a slight 9% crop yield premium to the comparable region average on slightly higher costs.

Gross profit erased by SG&A

MCB Agricole delivered 6%-34% gross margins in 2008-10, net of IAS 41 revaluations. Further 18-20 pp erosion from the SG&A line, slightly compensated by VAT grants, resulted in EBITDA margins of 9% in 2008, -6% in 2009 and 16% in 2010 – low figures by any means. With management guidance on a 32%-60% costs/ha increase in 2011, we expect the company’s gross margin to decline to 21% in 2011 despite a record harvest. Over the next decade, we see the company barely breaking even: a gross margin in the 13%-22% range should be eaten away by high SG&A costs.

EBITDA margin		SG&A as % of sales
Note: Excluding the effect from revaluation of biological assets and remeasurement of agricultural produce. Source: Company data, Concorde Capital calculations

One of the lowest realized selling prices

We calculate the company`s average selling prices were 6%-10% below our estimate of Ukrainian average prices provided by APK-Inform, unlike for most listed agricultural companies, which report 5%-20% premiums to the same set of prices.

Inventories balance, usd mln

	2009	2010
Agricultural produce at year start	2.9	0.7
Sales of agricultural produce	24.9	33.5
Agricultural produce at year end	0.7	3.6
Implied value of harvest	22.7	36.3
Value of harvest estimated at APK-Inform prices	25.1	38.9
Discount of average selling prices to APK-Inform	-10%	-6%

Source: Concorde Capital

Acquisition target

After the company failed to list on the Warsaw Stock Exchange (December 2011), we see company as a clear acquisition target. We see two key reasons behind that: (1) low profitability (the company has been in a steady-state in terms of landbank size over the last three years, CapEx has been minor, thus we do not expect significant company-specific changes) make the business model unsustainable over the long-term; (2) the company is a non-core business for major shareholders, who are focused on their real estate business. Though the company is the largest in terms of landbank size among those on sale, the pool of candidates to acquire it is limited due to its land dispersion. Sale by parts looks like the most logical exit for majorities, though in that case we expect little value for minorities. Moreover, the track record of acquisitions of public companies in Ukraine is not inspiring for minority shareholders.