Monsanto Company : Update Target Price $149

 

MON : NYSE :

US$109.73 BUY 
Target: US$149.00 ↓

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/F14 RESULTS MOSTLY IN LINEAND F15 GUIDANCE IS REITERATED

Investment highlights
 Monsanto reported adjusted Q4/F14 EPS of US$(0.27) versus our
and consensus estimate of US$(0.24). F2015 annual guidance was
provided at US$5.75-6.00 versus our original estimate of US$6.04
and consensus of US$6.01. This guidance is in line with
management’s prior comments of double-digit to mid-teen growth
in F15 EPS.
 Operationally, we expect further improvement in Seeds & Genomics
in F15, with our expectation of YOY gross margin growth of 11.7%.
We expect to see a continued lift in the product portfolio (a
laddering-up, if you will), with farmers seeing an increased bill (a
benefit to Monsanto) but being offset by increased yield to the
farmer (a benefit to the farmer). As the fiscal year unfolds, we
anticipate confirmation of the 10-12M acres of Intacta and a good
(although delayed) order book for the US spring, both of which we
see as comforting highlights for investors through a more
challenging commodity price environment
Valuation
We continue to rate the shares of Monsanto a Buy but have lowered our
target price to US$149 (from US$155 previously) based upon a 21.5x
multiple (from 22x previously) to our F16 EPS. The reduction in our
multiple is due to the general commodity pricing environment and
investors’ increased conservative approach towards agriculture equities.

Finning International Inc

FTT : TSX : C$31.84 BUY 
Target: C$35.00

Finning International Inc. is the world’s largest Caterpillar
equipment dealer. Finning sells, rents and provides
customer support services for Caterpillar equipment and
engines in western Canada, the United Kingdom and
parts of South America. Headquartered in Vancouver,
British Columbia, Canada, Finning is a widely held,
publicly-traded corporation, listed on the Toronto Stock
Exchange (symbol FTT).
All amounts in C$ unless otherwise noted.
Infrastructure — Equipment Distribution and Rentals
GETTING SHAREHOLDER FRIENDLY?
REITERATE BUY; TARGET RAISED
Investment recommendation
We rate Finning a BUY. In our view, the company could be in a position
by year-end to return a meaningful amount to cash to shareholders,
possibly up to $500 million. Separately, management’s efforts to drive
EBIT and lower invested capital could drive 35 cents in incremental EPS
over 2-3 years. We take our target to C$35.00 (from C$33.50) as we roll
our valuation period forward to 2016E EPS. We maintain a 14x target
P/E. FTT trades at 13.6x 2015E EPS vs. close comps at 14.5x.
Investment highlights
Q2/14 EPS was $0.50 (+4% y/y), ahead of our $0.45 estimate and the
Street at $0.46. Revenue of $1.8 billion increased 9% y/y on strong oil
sands deliveries, Product Support growth of 4% y/y, and FX. Gross
margin of 29.6% was 60 bps below our estimate due to the high
proportion of New Equipment sales. SG&A of $388 million (22.0% of
revenue) was down from $392 million (24.2% of revenue) in Q2/13. This
left EBIT at $137 million (7.8% margin), which compares to our $122
million estimate (7.2% margin), and last year at $123 million (7.6%).
Steady backlog of $1.1 billion (flat y/y) affords decent visibility in 2H/14.
FCF was the highlight of the quarter coming in at $123 million vs. $7
million last year on lower capex and better inventory turns. TTM FCF is
an impressive $500 million and the debt/cap should be at the low end of
management’s target range (35-45%) by year-end (currently 41%)
leading us to believe a return to shareholders could be in the cards. We
do not see competing options (M&A, reinvestment) as probable.

Agrium Inc.

AGU : NYSE : US$90.05
AGU : TSX
BUY 
Target: US$104.00

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

Agriculture — Fertilizer
Q2 BETTER THAN EXPECTED BUT UNEXPECTED POTASH COSTS ADD
TO SHAREHOLDER FRUSTRATION
Investment recommendation
Following a plant outage-plagued 2014 that significantly hurt EPS
potential in the current year, we feel the stability of Agrium’s base retail
segment and the growth in wholesale volumes and earnings bode well
for the company going forward. The strong EPS growth profile due to
substantial volume increases and an improvement in costs over the next
two years offers good value to shareholders. We estimate retail EBITDA
to improve by 9% in 2015, nitrogen wholesale to realize a 750kt (21%)
sales volume improvement (and lower opex costs), and a 900kt (76%)
improvement in potash sales volumes in 2015 as their expansion enters
service, which allows for a normalization of the original tonnage and
additional sales via the retail business for the expanded tonnage. All of
the various plant outages in 2014 created a trough earnings situation
that should materially correct itself in 2015. We then expect to see
further growth into 2016 via the Borger nitrogen expansion, the
continued ramp up of the Vanscoy potash expansion and via retail sales
improvements.
Investment highlights

 Agrium reported adjusted Q2/14 EPS of US$4.31 versus our
estimate of US$4.15, consensus of US$4.11 and guidance of
US$3.85-4.35. Total gross margin was slightly above expectations at
US$1.60 billion versus our of US$1.56 billion estimate. Notably,
Retail gross profit was US$1.35 billion versus our US$1.31 billion
and Other gross profit was US$23 million versus our estimate of nil.
However, Nitrogen gross profit was weaker than expected at
US$137 million, versus our estimate of US$166 million, due in part
to lower volumes resulting from previously disclosed plant outages.
Valuation
We continue to rate the shares of Agrium a BUY but have lowered our
target price to US$104 (from US$106 previously) based upon an 11.5x
multiple to our blended 2015E/2016E EPS.

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

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