Freshly minted Viterra enjoying fruits of agriculture boom
RICHARD BLACKWELL
From Thursday's Globe and Mail
October 4, 2007 at 9:08 AM EDT
theglobeandmail.com
In a rare confluence of events, the gods seem to be smiling on Canada's agriculture industry.
Commodity prices are high, the weather has been reasonable, higher income levels in Asia are boosting demand for food products, and a shift to growing corn for ethanol in the United States is opening up markets for other grains.
All that, and the successful takeover of a rival, has helped pump up the stock price of one of Canada's biggest public agricultural companies, Viterra Inc., formerly known as Saskatchewan Wheat Pool.
When SaskPool launched its bid for rival Agricore United almost a year ago, chief executive officer Mayo Schmidt declared that it was the right time to build a Canadian grain-handling powerhouse.
Now that the deal has closed and the combined company has begun to operate under its new name, he's just as effusive. "It is clearly a time of prosperity in agriculture," he said on a conference call after the company's quarterly results were released in September. "We expect that to continue for many years to come."
The company will have combined annual sales of around $4-billion. In the most recent quarter, ended July 31, Viterra reported that three months of revenue from SaskPool and two months from Agricore totalled $1.4-billion, with a profit of $96-million.
Investors seem to agree the company is doing something right. The stock is close to its 52-week high of $12.25, and almost double where it was last November when it began its run at Agricore.
Gerry Hannochko, an analyst at Genuity Capital Markets in Toronto, says the stock still has room to rise. He has a "buy" rating on Viterra with a 12-month target of $13.75.
Just a few years ago, SaskPool was struggling and had to sell off assets but it is now in dramatically better shape because of strong agricultural markets, Mr. Hannochko said.
What's more, combined with Agricore, it is in a much more varied range of businesses and territories, and this is reducing overall risks. "What was a company that was very heavily weighted to Saskatchewan grain handling ... is now much more diversified across the prairies," he said.
Viterra is now the biggest grain handler in the west - with 104 elevators and a 42-per-cent market share - but it also has substantial other businesses selling seeds, fertilizers and pesticides, processing oats, barley and livestock feed, and providing financial products to farmers.
"The overall contribution from the handling side is a lot lower, so it diversifies away from the highest-risk portion of the business," Mr. Hannochko said. He predicts Viterra's sales of fertilizers and pesticides will be particularly strong in the coming year, as most farmers generated enough income to spend substantially on these products.
Mr. Hannochko said he is also impressed with the management group Mr. Schmidt forged from the two companies. And he says it is a good sign the estimate of cost savings to be generated from the merger has been raised to $92-million from $90-million.
David Newman of National Bank Financial is also impressed by Viterra's diversification strategy, which he says has turned it into "an extremely strong organization."
It is remarkable that, even after taking over Agricore, which was a bigger organization, Viterra has maintained a healthy balance sheet and cash flows. It also has very valuable tax-loss carry forwards.
Still, Mr. Newman is cautious about further appreciation in Viterra's stock price in the short term because of a softening of some grain exports - he has a "sector perform" rating on it and a 52-week target of $10.75. But he says he could be more bullish further down the road, especially if the Canadian Wheat Board monopoly is dismantled and Viterra's grain-handling volumes jump as a consequence.
Cherilyn Radbourne of Scotia Capital is the least enthusiastic among analysts who cover Viterra. She said in a recent report that the stock is expensive, given that the company's earnings are so sensitive to unpredictable weather conditions.
She has a "sector underperform" on the stock, with a one-year target of $10.25.
Despite the complexities of marrying SaskPool and Agricore into one organization, Mr. Schmidt has hinted that Viterra is interested in further expansion.
The company will consider building or acquiring an operation in the booming biofuels business, "should the opportunity arise," he said. It may also expand into canola processing - a business SaskPool was once in, but sold off in 2002.
Mr. Hannochko is enthusiastic about those possibilities. "It depends on what [Viterra] pays for it, but ultimately it makes a lot of sense to expand along the value chain, where you're not just the handler, you're actually a value-added processor," he said.
Ms. Radbourne is more cautious about Viterra's ambitions in oilseed crushing and biofuels. Valuations in those sectors have increased because of the generally positive outlook for agriculture, she said, so "we hope that management will be disciplined and not pursue growth for the sake of growth."
Her main concern: a glut of biofuel capacity in North America.
Viterra
(VT-TSX)
Yesterday's close $11.81, down 10¢
Quick facts
Headquarters
Regina
Biggest shareholder
New York private investment firm Third Avenue Management LLC
Grain elevators
104, in Manitoba, Saskatchewan, Alberta and B.C.
Retail outlets
276, selling seed, chemicals
and fertilizer
Port terminals
Thunder Bay, Vancouver,
Prince Rupert
Projected annual revenue
$4-billion (combined companies)
By the numbers
4Q (July 31) revenue$1.4-billion
4Q profit$96-million
4Q EBITDA$150-million
Market capitalization$2.4-billion
Debt/equity39 per cent
Employees4,400 |
