Adecoagro (AGRO, Financial), which has surged by 36% in YTD15, is one of the top stock picks for George Soros (Trades, Portfolio) with the legendary investor holding 25.92 million share of the agricultural company. There are strong reasons to be bullish on Adecoagro for the long term.
Adecoagro is in the business of farming with 122,000 hectares of owned land and a diversified farming business (corn, soy, wheat, sunflower and cotton). Adecoagro also has 10.2 million tons of sugarcane-crushing capacity and is a fully integrated producer of sugar, ethanol and energy.
The company is also involved in the process of land transformation. In this segment, the company acquires underutilized and undermanaged farmland and transforms it to its highest productive level, thus increasing its value. The mature land is then put up for strategic sale.
The company’s farmland valuation has a meaningful impact on the company’s overall valuation. According to the farmland valuation report prepared by Cushman & Wakefield (as of Sept. 30), the company’s total farmland valuation was $935 million.
In the last three years, Adecoagro has sold land after transformation at a premium of 17% to 28% over the appraised value of the farmland. Even if a midrange over the appraised value of farmland is considered, a 22.5% premium would imply that the company’s farmland has a current market value of $1.15 billion. Adecoagro currently has a market capitalization of $1.3 billion, and this underscores the point that the stock is not expensive. Considering the underlying value of the farmland and considering the cash flow from ongoing business, Adecoagro deserves higher valuations.
Coming to industry fundamentals, global population is expected to reach 9 billion by 2050, and continued increase in population requires high food production coupled with per acre productivity increase. There is still a huge amount of uncultivated land in Sub-Saharan Africa and Latin America. This provides Adecoagro with immense growth potential through land acquisition, farming and land transformation. While the company’s farming and land transformation business revenue growth has been flat in the last three years, its capital expenditure has been primarily allocated toward the sugar and ethanol business.
In the sugar and ethanol segment, the company’s revenue has increased from $269 million in FY12 to $379 million in FY14. During the same period, the EBITDA has increased from $98 million to $154 million. Therefore, there is steady growth as the company’s crushing capacity increases. Weather conditions can affect the farming and land transformation business along with lower prices for essential commodities. However, the long-term fundamentals remain strong considering the continued increase in demand for food. I am mentioning this point as the company’s YTD15 results in the farming segment have been affected by lower prices of soybeans, wheat, rice and milk.
From a balance sheet perspective, Adecoagro had debt of $809 million and cash of $224 million as of 3Q15, translating into net debt of $585 million. With an annualized EBITDA of $166 million, leverage is not an issue. Growth should sustain in the coming years, and this provides Adecoagro with ample financial flexibility to continue with robust capital expenditure program. In addition, continued farmland sale also provides additional liquidity for crushing capacity expansion and working capital.
Adecoagro has a long way to go and is a portfolio stock. It is entirely likely that the stock consolidates before the next leg of upside, but current valuations are attractive for exposure with a time horizon of three to five years.
Disclosure: No positions in the stock
