Monsanto Company

MON : NYSE : US$115.12
BUY 
Target: US$135.00

COMPANY DESCRIPTION:
Monsanto is a leading global provider of seeds, biotechnology traits, and glyphosates. The company operates two segments: Seeds and Genomics and Agricultural Productivity. The seeds and genomics segment consists primarily of soybeans, corn, cotton, and vegetable seed brands, as well as biotechnology traits that help control weeds and insects. The agricultural productivity segment consists of crop protection, including glyphosates.
All amounts in US$ unless otherwise noted.

Agriculture — Biotechnology
Q1/F14 EPS BEATS; ANNUAL GUIDANCE UNCHANGED
Investment recommendation
We believe investors should continue to own the shares of Monsanto due to its solid product platform and its strong growth prospects, both near and medium term. We expect the company to capitalize on its next generation products in South America, increased market share across the Americas, and margin gains across its core products. The initial 3M acre Brazilian launch of Intacta bodes well for a sales trajectory (product adoption) over the next few years. The expected launch into Argentina in 2015 should only augment that product’s positive outlook. We expect the Integrated Farming System segment to add a boost to the company’s earnings profile over the medium term. It is an intriguing business that rounds out their product offerings, a business that should offer investors continued share pricing gains in the years ahead as the business is rolled out and gains traction.
Investment highlights
 Monsanto reported adjusted Q1/F14 EPS of US$0.67 versus our estimate of US$0.63, and consensus of US$0.64. The results were mildly better than expected due to higher Agriculture Productivity gross profit, partially offset by higher opex. Total gross margin was reported at US$1.56 billion, above our US$1.38 billion estimate (Figure 1), while operating costs were US$1 billion versus our expectation of US$0.87 billion. The company confirmed F2014 EBITDA guidance at US$4.65-4.80 billion and F2014 EPS guidance of US$5.00-5.20, versus our estimate of US$5.13 and consensus of US$5.27.
Valuation
We continue to rate the shares of Monsanto a BUY, but have increased our target price to US$135.00 (from US$124.00 previously), based upon a 22.5x multiple to our F2015E EPS

Darling International Inc

DAR : NYSE : US$21.47
BUY 
Target: US$25.00

COMPANY DESCRIPTION:
Darling International is a leading provider of rendering and bioresource solutions to agriculture and industrial
markets.
All amounts in US$ unless otherwise noted.

Sustainability — Bioresources
 MAINTAIN BUY, $25 TARGET
Investment recommendation
The bold strategic transformation continues, as Darling executes well through a commodity reset and positions the company into a truly global growth platform of value-added food, fuel, feed and pharma ingredients (with lessening commodity exposure). We like the recent moves (Rothsay in our numbers, Vion not yet), and reiterate our BUY recommendation.
Investment highlights
 Diamond Green Diesel (DGD)
Production is at nameplate (~9300 Bbls/day) and margins stay favorable, even as Friday’s RFS ruling (disappointing, but we expect DGD to take share) and pending Vion deal keeps shares volatile.
 We’re impressed with the Valero expertise (and staff) that runs this plant (via the JV) from engineering to feedstock procurement and fuel distribution. In our view, feedstock type, price and prep are the key. The initial success (and potential future demand from the Californian low carbon fuel market, for example) begins to drive the early idea of capacity expansion (or even plant #2).
 Next catalyst likely comes with the announcement of the Vion financing structure, perhaps into calendar year-end.
Valuation
Our 12-month price target of $25 is derived by applying a ~10x EV/EBITDA multiple to our CY14 estimate of $385M.
Risks
Commodity price fluctuations, integration activities, plant execution risk.

MBAC Fertilizer Corp.

MBC : TSX : C$2.07
BUY 
Target: C$3.55 

COMPANY DESCRIPTION:
MBAC Fertilizer Corp. is a Canadian-domiciled development corporation focused on becoming a significant integrated fertilizer producer in Brazil. The company has ownership of assets within various regions of Brazil, but its immediate focus is on the development of the Itafos phosphate deposit in Goias state. Longer term, MBAC intends to produce phosphate from multiple locations across Brazil.
All amounts in C$ unless otherwise noted.

MBAC RELEASES BFS ON SANTANA
Investment recommendation
The net result of this press release to our model is favourable later in the decade as Santana ramps up to capacity in 2017E. The lowering of our capital expenditure estimate and of our operating cost assumption (albeit not to the company’s estimated levels) are net positives. However, given that our target price is based upon our 2015 EBITDA estimate and that our multiple takes into consideration the strong growth potential from additional forecast future production, our target price remains unchanged.
Investment highlights
The capital cost estimate is US$427 million (including a US$50 million contingency). There are some costs borne at the Itafos project (a US$323 million project) that would not be duplicated at the Santana project (a water dam, pre-planning/design for a doubling of output, etc), but other costs such as infrastructure to the site would be substantial (and hence why the overall cost was always expected to be higher at Santana). However, that is offset by a much higher grade and lower operating cost mine. The company expects to produce 500ktpa of SSP 0-19-0 product (which is a more valuable grade of product than what is being produced at Itafos (1-17-0) due to the much higher grade of the Santana ore body). Estimated operating cost per tonne at Santana in the BFS is US$113 versus our original estimate of US$140.
The reaction to the release was negative, not to the BFS, but to the lack of an update on Itafos, which is ramping to full operational capacity and should be at the desired level in Q4/13. We assume that the company will sell 50kt of SSP in 2013. We do highlight that every 25mt of sales only impacts our estimated cash balance by less than C$2 million. As a result, at this stage, we are more focused on the ramping up of the facility in Q4 than whether or not they meet or miss our sales estimate by 25kt in 2013, given how little an impact that is to their financial situation as estimated in our model. Further commentary on their financial position is discussed below and we believe funding is no longer a concern.
Valuation
We continue to rate the shares of MBAC a BUY with a 12-month target price of C$3.55 based upon a 9.5x multiple to our 2015E EBITDA of C$80.9 million.

Monsanto Company Target Price $124

MON : NYSE : US$104.04
BUY 
Target: US$124.00

COMPANY DESCRIPTION:
Monsanto is a leading global provider of seeds, biotechnology traits, and glyphosates. The company operates two segments: Seeds and Genomics and Agricultural Productivity. The seeds and genomics segment consists primarily of soybeans, corn, cotton, and vegetable seed brands, as well as biotechnology traits that help control weeds and insects. The agricultural productivity segment consists of crop protection, including glyphosates.
All amounts in US$ unless otherwise noted.

Agriculture — Biotechnology
Q4/F13 RESULTS; F2014 GUIDANCE IN LINE WITH OUR ESTIMATE (NET OF ACQUISITION COST)
Investment recommendation
We expect further market share gains and a positive outlook for sales and gross margin of the company’s products going forward. We further believe that the strong Latin American planting this fall will be followed another strong US planting next spring, allowing for a good basis on which to build earnings growth through F2014 and beyond. Our forecast period should provide positive catalysts in the form of the Intacta launch in Brazil, FieldScripts in the US, the rebirth of soybean sales in Argentina, and continued market share gains and margin expansion in both North and South America. We feel that the potential value that can be unlocked from the IFS platform is quite intriguing and we believe investors have an opportunity to immensely benefit from that line of business once it gains traction expected in the years ahead. We continue to prefer Monsanto as our top large cap agricultural equity (it remains on the Canaccord Genuity Focus List) and we continue to highlight a relative trade that favours Monsanto over the fertilizer-weighted equities, and specifically the potash-weighted equities.
Investment highlights
 Monsanto reported a Q4/F13 loss per share of US$0.47 versus our and the consensus estimate of -US$0.43. The company provided F2014 EPS guidance of US$5.00-5.20, inclusive of a US$0.14 per share acquisition dilution effect (related to this morning’s announced acquisition of The Climate Corporation), versus our estimate of US$5.22 and consensus of US$5.34. Excluding the acquisition cost impact to earnings, guidance would have been US$5.14-5.34, in line with our estimate.
Valuation
We continue to rate the shares of Monsanto a BUY, but have increased our 12-month target price to US$124.00 (from US$121.00 previously) based upon a 21x multiple to our F2015E EPS.

Darling International Inc.

DAR

 NYSE : US$20.75 BUY 
Target: US$25.00

COMPANY DESCRIPTION:
Darling International is a leading provider of rendering and bioresource solutions to agriculture and industrial markets.
All amounts in US$ unless otherwise noted.

Investment recommendation
We are upgrading to BUY as the acquisition of Rothsay marks another key milestone in Darling’s growth strategy, with the company deepening its footprint in No. America while improving supply-side visibility and  further de-risking the story now with DGD operational. Management has pulled-off bigger deals with no issues (leverage still remains low) and we like the aggressive approach here.
Investment highlights
 Friday, Darling announced the pending acquisition (expected close by year-end) of Maple Leaf Food’s rendering assets (Rothsay division – in Canada for CDN$645M (~7.6x TTM EBITDA of CDN$85M). While a bit rich given the auction process,
the all-cash deal will be financed with debt (post deal leverage ~ <2.5x) and accretive by ~$0.20 in EPS.
 Rothsay operates 5 large (and modernized) rendering plants in Ontario (3), Manitoba, and Nova Scotia, as well as a ~10M gpy biodiesel facility in Quebec (located near a large Valero refinery).
Primary synergies look to be increasing value-add product capabilities and DGD leverage, as well as potential bakery/cooking
oil collection expansion.
 Our estimates adjust preliminarily to incorporate the addition of Rothsay starting with Q1/14 (CY14 revenue/EPS stimates go to $2.25B/$1.65 from $1.84B/$1.45). We expect to refine our estimates as the transaction is finalized.

Maple Leaf Foods Inc.

Maple Leaf Foods Logo

Maple Leaf Foods Logo (Photo credit: Wikipedia)

MFI

 TSX : C$14.44 HOLD 
Target: C$15.00

COMPANY DESCRIPTION:
Maple Leaf Foods is a leading Canadian food processing company. The company operates in Canada, the US, and the UK manufacturing both protein and bakery products which it sells to a variety of end users including retail, foodservice, and grocery store chains.
All amounts in C$ unless otherwise noted.

Investment recommendation

Maple Leaf announced an agreement to sell its Rothsay rendering and biodiesel division to Texas-based Darling International, for $645 million.
We believe this represents a fair purchase price and note that the transaction is: (1) accretive at the EBITDA level; and (2) will allow for a meaningful reduction in net debt from currently elevated levels. Incorporating the transaction and rolling forward the estimates used to generate our target price from 2013 to 2014, our target price moves to C$15.00 (from C$13.50). However, we maintain our HOLD rating.
Investment highlights
 The transaction is accretive at the EBITDA level. Given that Rothsay generated $85 million of EBITDA in 2012, Darling is paying 7.6x 2012A EBITDA for the division. This is above Maple Leaf’s current multiples of 7.2x 2012A EBITDA and 7.0x 2014E EBITDA.
 Management stated that it will use the proceeds to pay down debt. Post closing of the transaction expected at year-end, we forecast net debt/EBITDA of 2.2x. This represents a meaningful improvement from our prior 4.0x estimate. We note that it also gives management considerably more latitude in capitalizing on core business related opportunities, while also potentially expediting the return of capital
to shareholders.
Valuation
Our 12-month target represents 7.2x 2014E EBITDA. While we view Maple Leaf’s divestiture as positive, and remain constructive on the name longer term, the next few quarters are expected to remain pressured by volatile commodity costs and increased transactional costs as the company implements its Value Creation Plan. As a result, we believe investors should wait for a more attractive entry point

Agrium Inc. Potash Sector Star

Agrium Forgetmenots vs Know Potential-8644

Agrium Forgetmenots vs Know Potential-8644 (Photo credit: TMYphoto)

AGU : NYSE : US$87.26
AGU : TSX
BUY 
Target: US$106.00 

COMPANY DESCRIPTION:
Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in North America, South America and Australia.
All amounts in US$ unless otherwise noted.

Investment recommendation
We continue to prefer the non-potash equities over the potash equities due to an oversupply in the potash market and the added uncertainty that has now arisen as a result of the Uralkali announcement (which has been followed by a lowering of prices into a few markets, and more importantly, the expectation by buyers of a lowering of price into all markets). Monsanto (BUY, US$121.00) remains our top pick, followed by Agrium on a relative trade. We continue to prefer, on a relative basis, the shares of Monsanto here (as the outlook for its seed business in the Americas continues to look positive, providing continued earnings momentum), and Agrium on a relative basis (where its retail segment offers less volatility through a wide range of inputs from seeds to fertilizers to chemicals, as well as exposure to all three wholesale fertilizers) versus those of Mosaic and Potash Corp., where the majority of their business is exposed to potash sales. And given the multiple spread mentioned below, we believe that as the market fundamentals unfold, Agrium will continue to narrow the spread on the potash producers, something that has been occurring since Agrium announced Q1 results in early May.
Investment highlights
 Agrium reported adjusted Q2/13 EPS of US$4.94 versus guidance of US$4.60-5.40, our estimate of US$4.92 and consensus of US$4.95.
 On a P/E multiple basis, the potash equities have historically traded at a 2.5+ point multiple premium to Agrium. That spread widened through the winter, such that Potash Corp.’s multiple spread discrepancy versus Agrium ballooned to 5.7x through the end of April, but has since narrowed to 3.7x. We expect the relative trade to continue to narrow in Agrium’s favour over the next few quarters.
Valuation
We continue to rate the shares of Agrium a BUY with a 12-month target price of US$106.00 based upon a 10.75x multiple to our blended 2014E/2015E EPS

Agrium Inc.

Agriculture

Agriculture (Photo credit: thegreenpages)

AGU : NYSE : US$94.99
AGU : TSX
BUY 
Target: US$118.00

COMPANY DESCRIPTION:
Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in North America, South America and Australia.

All amounts in US$ unless otherwise noted.

Investment recommendation
Although the mid-point of Agrium’s guidance was below expectations, we don’t believe the market agreed with consensus given the spring planting delays to date and as a result, we see the guidance as a only a slight negative. The slow progress of the US spring planting has impacted the company’s outlook for the second quarter but not by as much as it could have been, as the weather has turned for the better.

Given Agrium’s earnings growth potential over the next few years, its relatively less volatile earnings profile and its exposure to a wide array of agricultural product offerings, we believe the overall demand across the agriculture input market will allow the stock to be a relative outperformer in the sector. Monsanto remains our top pick due to its earnings growth, market share increases and new product offerings. We continue to rank Agrium as our second preferred equity to own. We would then follow that with Mosaic and Potash Corp (in that order). We remain with our neutral view on the potash producers, as we believe the potash market lacks sufficient catalysts regarding an upside surprise in industry volumes or pricing in 2013. However, we believe Mosaic offers opportunities for a significant amount of cash to be returned to shareholders in the near term.
Investment highlights
Agrium reported adjusted Q1/13 EPS of US$1.03 versus our and consensus estimate of US$1.08. Total gross margin was weaker than expected at US$716 million versus our expectation of US$791 million. Softer nitrogen gross profit (US$173 million versus our US$197 million) and a weaker retail segment (US$376 million versus US$413 million) were responsible for the discrepancy. Management guided Q2 EPS to a range of US$4.60-5.40. The company also announced an NCIB bid.
Valuation
We continue to rate the shares of Agrium a BUY but have lowered our target price to US$118 from US$120, based upon a 12x multiple to our blended 2013E/2014E EPS.

Gevo CRUNCH TIME HAS COME; MAINTAIN BUY, TARGET TO $5.00

Isobutanol

Isobutanol (Photo credit: Wikipedia)

GEVO : NASDAQ : US$1.86
BUY 
Target: US$5.00

COMPANY DESCRIPTION:
Gevo seeks to produce isobutanol, a key building block in the production of valuable chemicals and fuels, from a variety of cellulosic and non-cellulosic carbohydrate sources containing fermentable sugars.

Investment recommendation


While the Street takes a wait-and-see approach here on the success of this speculative biorefinery business model, we find the technology and ultimate opportunity supporting a positive risk/reward longer term.
Investment highlights
 The quarter itself was uneventful, as all eyes remain on kick-off of the Butamax trial April 1 (expected ~1 week timeframe) and eventual re-start of isobutanol production at Luverne (currently idled, on track for later in ’13).
 Partners stay committed, while the patent portfolio continues to build (including several awards so far in ’13). We continue to see potential for a cross-licensing agreement with Butamax to emerge.
 Cash remains encouraging (~$67M), while a detailed outlook was not provided given imminent start of the Butamax trial.
 Our 2013 estimates go to $15.3M/$(1.85) from $24.1M/$(1.64), and 2014E goes to $61.1M/$(1.02) from $77.4M/$(0.82).
Valuation
We derive our $5 target (from $6) by applying a ~3x EV/sales multiple to our ’14 rev estimate of $61M, discounted one year at 20%.
Risks Execution against milestones, commodity cost + price volatility, future fundraising, Butamax litigation.

Agrium Inc. Q4/12 EPS / AGM Troubles

AGU : NYSE : US$101.13
AGU : TSX
BUY 
Target: US$127.00

COMPANY DESCRIPTION:
Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in North America, South America and Australia.

Investment recommendation


We expect a strong US spring planting season to benefit the retail division and the nitrogen segment. In addition, we believe the potential exists for an early spring and the resulting increase in urea pricing as a result of logistical constraints on imported product.

We believe earnings should perform well through the spring due to our positive fundamental view. There’s a catch though – if Jana (Agrium’s largest shareholder at 7.5% ownership) is successful in electing its slate of directors to Agrium’s board at the April 9 AGM, then that would state that a majority of shareholders voted them in and those shareholders likely believe that greater efficiencies or a potential sale/break-up of the company is forthcoming, and the share price should continue to increase post that election on that basis as well. However, if Jana is unsuccessful in having its directors elected, then we believe the concern out there would be that Jana may choose to sell their shares in the near future (in addition to fears of some shareholders assuming the same), and we would then expect to see pressure on the share price in the near term.

We believe that some shareholders are already lowering their positions in defense of that downside share selling pressure that may be forthcoming. We further believe that explains the downside move in Agrium’s shares. Personally, we do not believe Jana will be successful in having their
directors nominated, and as such, we believe there will be downward pressure on the shares in the near term.
Investment highlights
 Agrium reported adjusted Q4/12 EPS of US$2.16 versus our and the consensus estimate of US$2.03 and the recently increased company
guidance of “slightly above US$2.00.”
Valuation
We continue to rate the shares of Agrium a BUY, but have lowered our 12-month target price to US$127.00 from US$129.00 previously, based
on a 12.5x multiple to our blended 2013E/2014E EPS of US$10.18.

Follow

Get every new post delivered to your Inbox.

Join 1,942 other followers