Investment Case

We initiate coverage of Sintal Agriculture (SNPS GR) with a HOLD recommendation due to the high stock-specific risks, which we do not see worth the current 52% upside to fair value. While management guidance for 2011 indicates a significant 25% yoy cost reduction and the Agri&Ca acquisition in 2011 was definitely value-accretive, we are not confident that management is committed to value creation for all shareholders: it has low historical crop selling prices, high production costs in 2009-10 and a poor track record as a public company.

25% Yoy cost reduction in 2011 should improve margins

A significant cost reduction in 2011, by 25% on average per ha, as guided by management, should lead to a significant improvement in profitability: from 5% in 2010 to an estimated 21% EBITDA margin in 2011. At the same time we note that we haven’t got an explanation from the company why its costs have decreased in 2011 vs. 2010 (all other companies reported an increase) and find it hard to believe why Sintal`s costs per ha were lower than for majority of its peers, as we don’t see any operational advantages in the company.

Sintal`s production costs, USD/ha

Source: Company data

Most of land is located in the south of Ukraine

Most of Sintal’s land bank (119 of 146 ths ha) is located in Kherson region in Southern Ukraine, with the rest in Kharkiv region in the east. The Kherson region has comparably dry and hot weather, and delivers below-average yields for all key crops, except soybean. Nonetheless, Sintal`s track record shows profitable low-cost, low-yield operations are possible in the region. Wheat, sunflower and barley are Sintal’s key crops by area planted.

Landbank increased by 1.5x in 2010 through non-cash acquisition

Sintal acquired a 100% stake in Agri&Ca, an agriculture enterprise with 49-year lease rights to a 46 ths ha landbank in Kherson region, in return for a 6% equity stake in the company. In addition, a former owner of Agri&Ca, Icon Private Equity, granted a USD 8 mln loan to Sintal, which is convertible into a 4.8% stake in Sintal Agriculture. The 6% stake for 1/3 of its combined landbank seems like a bargain deal for Sintal, even accounting for the likely lower quality of acquired land. At the market price at the time of deal’s announcement, Agri&Ca`s lease rights were valued at USD 210/ha per ha (USD 418/ha for the whole company), lower than USD 440-1,500/ha range paid by other listed companies in 2011.

Irrigation is a growth option

The weather in Kherson region is well suited for irrigation-based farming, with possible yields 2x-3x above current averages and selective application of two crop harvests per year. A significant network of Soviet era irrigation channels is present in the region though additional CapEx would be required, estimated at USD 1,500-2,500/ha. Though we view this capital-intensive model well suited to farmers with access to cheap capital, we do not see evidence that Sintal would be one of the front-runners in this field under current management: it has been located in the region for quite a while and has done little in terms of irrigation-based farming.

Non-core asset for majority shareholder

A key risk for minorities is the fact that Sintal Agriculture remains a non-core asset for its majority shareholder, whose core business is in real estate. In almost four years as a public company, Sintal has done little by way of value creation for minorities, beset by low margins, strangely high production costs in 2009-10 and extremely poor disclosure (including the absence of signed audited financials for 2010).

One of the lowest realized selling prices

We calculate the company’s average selling prices at 7%-9% below our estimate for Ukrainian average prices provided by APK-Inform, unlike most listed agricultural companies, which report 5%-20% premiums to the same set of prices.