Pat McKeough recently replied to a member of his Inner Circle looking for an opinion on Ag Growth International Inc. This leading producer of crop-harvesting equipment continues to expand by buying related businesses, says Pat.
Q: Hi: Just wondering about Ag Growth. As the world population grows, I see the farming service industry as highly important. Ag Growth offers an interesting investment opportunity as it is focused on grain storage and handling solutions in markets (Canada and the U.S.) where demand for planting acreage is growing. Thanks.
A: AG GROWTH INTERNATIONAL INC. (symbol AFN on Toronto; www.aggrowth.com) is a leading maker of portable and stationary grain-handling, storage and processing equipment.
Based in Winnipeg, the company sells its products through dealers and distributors in Canada and the U.S., as well as in Russia, Ukraine and elsewhere overseas. In 2015, 42% of its sales came from customers in the U.S., followed by Canada (31%) and international markets (27%).
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Ag Growth started out as an income trust. In May 2004, it first sold units to the public at $10 each and began trading on the Toronto Stock Exchange. In June 2009, it switched to a corporation and changed its name from Ag Growth Income Fund to Ag Growth International.
The company’s main brands include: Batco (crop conveyor belts), Wheatheart Manufacturing (grain-handling equipment), Westfield Industries (portable augers to transfer grain), Grain Guard and Keho (aeration and grain-drying equipment), Twister (grain bins), and Mepu (grain-drying systems).
Ag Growth has a history of expanding through acquisition. For example, in May 2015, it paid $221.5 million for Winnipeg-based Westeel. This firm makes grain-storage equipment and also has operations in Europe.
Thanks to its new businesses, the company’s overall sales rose 57.6%, from $301.0 million in 2011 to $474.3 million in 2015.
Due to the cost of integrating those new operations, Ag Growth’s profit is more erratic. Its earnings fell from $1.95 a share in 2011 to $1.37 a share in 2012. Earnings then rebounded to $1.77 a share in 2013. They rose further to $2.64 in 2014, but dipped to $2.18 in 2015.
The company has completed more acquisitions since the start of 2016. These include NuVision, a manufacturer of fertilizer blending and handling equipment. Depending on this business’s future earnings, Ag Growth may end up paying as much as $26 million for the purchase. That’s because the seller is entitled to a higher sales price if the business meets its profit targets.
Ag Growth also paid roughly $9 million for Entringer. This Brazilian firm makes grain bins, bucket elevators, dryers and cleaners.
As a result, total sales jumped 25.0% in the three months ended March 31, 2016, to $117.8 million from $87.6 million a year earlier. Without restructuring costs, earnings fell 22.2%, to $5.8 million from $7.4 million. Earnings per share declined 30.4%, to $0.39 from $0.56, on more shares outstanding.
Last year’s drought in Western Canada hurt crop production, as well as demand for Ag Growth’s grain-handling equipment. Lower international sales also reduced its earnings.
As of March 31, 2016, the company’s long-term debt was $312.1 million, or a high 53% of its market cap. It also held cash of $35.5 million.
Ag Growth’s business depends on crop conditions and harvest yields, which vary from year to year based on rainfall and other factors. However, today’s farms tend to have higher acreage and higher crop yields per acre. That’s because they manage their land better and seed technology has improved. This expands the company’s market.
As well, as agriculture expands and becomes more sophisticated, farmers are storing more of their crops on their properties. This helps Ag Growth benefit from its well-established position as a niche supplier of grain-handling equipment.
The company will probably earn $2.42 a share in 2016, and the stock trades at 16.3 times that estimate.
Ag Growth pays a monthly $0.20 dividend, which yields 6.1% on an annualized basis. That dividend seems safe for now, and the company is forecast to pay out a manageable 83% of its 2016 cash flow as dividends.
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I’ve held this stock since it was a trust, solely for the dividend. But it growth prospects seem limited.