Adecoagro (AGRO, Financial) is one of the leading companies in the production of food and renewable energy in South America. Present in Argentina, Brazil and Uruguay, the company’s main activities include the production of grains, rice, oilseed, dairy products, sugar, ethanol, coffee and cotton. This article discusses the reasons for being bullish on Adecoagro for long-term.
High Farmland Valuation
The fact that Adecoagro is undervalued is evident from the company’s farmland valuation. The Cushman & Wakefield appraisal and valuation of the company farmland in Argentina, Uruguay and Brazil as of September 2013, yields the following results –
21 rural properties located in Argentina totalizing 241.519 hectares and 1 located in Uruguay with 3.177hectares has a valuation of $792 million as of September 2013.
11 rural properties located in Brazil totalizing 33.639 hectares have a valuation of $127 million as of September 2013.
In total, the valuation of the farmland properties in the three regions adds up to $920 million. When this is compared with the company’s current market capitalization of $983 million, the extent of undervaluation is evident. I must mention here that the farmland valuation is as of September 2013 and one can expect a relatively higher valuation two quarters after the appraisal of the farmland.
The most important point to note here is that the farmland is expected to yield cash flows in the long-term and therefore the valuation will continue to increase and the farmland will also generate cash inflows through crop yield. The revenue generating asset is therefore one which will not depreciate, but appreciate with time. I can say this with some conviction because the global food problems are plenty and farmland is a prized asset in times of food scarcity and Greenland scarcity. Investors can therefore consider Adecoagro as a proxy for owning farmland and capitalizing on the agricultural commodities boom.
Gains From Farmland Sales
Adecoagro has a strategy of selling farmland if the price it gets is attractive. This helps Adecoagro keep debt within manageable limits and also use the proceeds of the sale in current and future capital expenditure. Over the last eight years, Adecoagro has sold 15 farmland measuring 51,000 hectares and this has translated into capital gains of $160 million.
Most recently (November 12, 2013) AGRO sold the San Agustin farm for a total price of $17.5 million, equivalent to $3,445 per hectare, representing a 19% premium over the Cushman & Wakefield independent appraisal dated September 30, 2013. This transaction generated approximately $14.9 million of operating profit in the fourth quarter of 2013. I specifically wanted to mention this because of the premium at which the farmland was sold over the Cushman & Wakefield independent appraisal. This implies that the appraisal might be relatively conservative and the valuation of the farmland might be in excess of $1 billion.
Robust 2013 Results
While farmland valuation might be good, it is important to consider the value and cash inflow the asset is adding for a going concern. For the year ended December 2013, Adecoagro clocked sales of $624 million, which was 5% higher than 2012 sales.
What was more encouraging is the fact that the adjusted EBITDA for 2013 surged by 28% to $181 million, which translates into an adjusted EBITDA margin of 28.9%. Adecoagro is therefore improving on the cash generation front and I expect this positive trend to continue amidst relatively firm global agricultural commodity prices.
From a valuation perspective, Adecoagro currently trades at 7.8 times EV/EBITDA valuation based on the current EV of $1.4 billion and 2013 EBITDA of $181 million. This looks attractive and should improve further in 2014 as more farmland assets get deployed in active production. Investors can therefore expect a good 2014 and valuations should adjust accordingly on the upside.
Conclusion
Adecoagro is probably the best farmland play in the US stock markets. The company is on a growth path and sustained cash inflow coupled with higher farmland valuations will take the stock meaningfully higher as compared to current levels. The company has a net debt position of $428 million, which looks comfortable considering the current net debt to EBITDA level of 2.4. my conclusion is that investors can consider exposure to Adecoagro with a long-term investment horizon for handsome gains.
