Winnipeg-based Ag Growth International (AFN:TSX) reported a 7% increase in total trade sales for the third quarter 2019. The manufacturer of storage, blending, mixing, conveying and processing of grain, seed and feed, said trade sales in the third quarter of 2019 increased over the prior year due to higher sales of portable grain handling and drying equipment, sales growth in Brazil and a strong performance from AGI’s recent acquisition in India. Sales growth in the quarter was tempered by challenging farm conditions in both Canada and the U.S., as well as by global economic uncertainties and their impact on the timing of customer commitments, most notably in offshore markets.
David Newman, analyst with Desjardins, said in a note, said, “AFN reported adjusted EBITDA of C$39 million, ahead of our forecast of C$35 million and consensus of C$36 million, against a tough macro backdrop given delayed planting and crop emergence in North America, as well as the impact of trade disputes on international customer commitments.”
Company management anticipates fourth quarter 2019 adjusted EBITDA will be largely in line with record 2018 levels, while margins will decrease due to adverse growing conditions, offshore headwinds and investments. “
“Farm sales are expected to be similar year-over-year due to robust demand for portable grain-handling equipment, offset by a very late harvest and other factors,” said Newman. “As AFN continues to navigate offshore markets, the commercial business will be impacted by global economic uncertainties and infrastructure deficiencies in developing countries, with fourth quarter 2019 sales projected to approximate 2018 levels. Management expects EBITDA margin to decline year-over-year due to a deferral of international projects, a higher proportion of sales from Brazil (lower margins during ramp-up) and the impact of poor weather conditions on AFN’s US grain storage business.”
AFN pointed to a positive 2020 set-up, driven by: (1) a growing expectation that US farmers will plant a record corn crop in 2020; (2) improved results from Brazil due to efficiency gains and increasing brand awareness; (3) greater conversion of backlogs in its key markets; and (4) contribution from India acquisitions.
According to Newman, AFN is looking at a drop off in Canadian sales, but a pick up in both U.S. and International geographies.
- Canada: (1) organic decline of 8% year-over-year on lower storage sales due to a challenging harvest season; (2) lower Commercial sales due to tough comps (a large fertilizer project) and large grain projects; and (3) contribution from acquisitions.
- US: (1) organic growth of about 2% year-over-year due to strong sales of dryers and stable performance in portable grain handling and grain storage equipment; and (2) higher Commercial equipment sales due to higher fertilizer project sales, offset by subdued demand for Commercial grain handling equipment. Commercial backlogs are higher year-over-year due to an increase in fertilizer and food projects.
- International: (1) organic growth of about 4% year-over-year due to elevated sales in Brazil, harvested from market development and improving economic conditions. International backlog exited the quarter at similar levels compared with the prior year.