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Ag Growth a 'unique pure play' in grain handling and storage gear

Ag Growth plans to increase its share of the market for storage bins to 30 per cent from 10 per cent.

Ag Growth/Ag Growth

For investors bullish on global agriculture but leery of volatile commodity markets, companies that sell farm equipment can offer an attractive way to bet on rising food prices.

One of the more intriguing stocks in the sector is Ag Growth International Inc., an equipment maker that is expanding from its base in Winnipeg into markets overseas. It's on track to increase sales by 23 per cent this year, while paying an attractive 5-per-cent dividend yield. Its shares have returned 42 per cent over the last 12 months, and analysts say there is room for further gains.

Ag Growth makes gear for grain handling, storage and conditioning. Its products - augers, conveyors, bins, aeration tools and drying systems - aren't flashy, but are essential for getting grains out of the fields and into the market.

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Chief executive officer Gary Anderson says growth in the next few years will come from some of the countries that made up the former Soviet Union, as well as from Latin America, China and southeast Asia. In pursuit of international sales, Mr. Anderson and his team spent almost $40-million on three acquisitions last year.

One key acquisition was a Finnish company called Mepu Oy, which provides Ag Growth with a European beachhead. The Winnipeg firm also gobbled up U.S.-based Tramco Inc., a maker of heavy-duty chain conveyors, in a bid to strengthen its position in Latin America, the Netherlands and China, and to expand into grain processing for the first time.

First-quarter revenue topped analysts' expectations this month, up 28 per cent to $66-million, led by international sales, which surged 62 per cent from the year-earlier period. Profit rose 8 per cent to $4.7-million.

Ag Growth offers a "unique pure play" in grain handling and storage equipment, says Damir Gunja, an analyst with TD Securities Inc.

Better yet, the company's shares trade at a discount to larger diversified agriculture-equipment companies The company's enterprise value - the total value of its stock and net debt - is 9.4 times its earnings before interest, taxes, depreciation and amortization, compared to an average 10.9 multiple for the sector, Mr. Gunja says. He rates the shares a "buy" and has a $59 price target on the stock. It closed Friday at $46.31.

Other manufacturers in the field include Vicwest Inc. , of Oakville, Ont., which commands as much as 70 per cent of the market for large grain storage bins in Canada, a position Ag Growth has recently set out to challenge with the opening of a $19.1-million bin plant in Nobleford, Alta.

Bins give farmers the ability to increase harvest capacity and hold back supply when prices are weak. While the storage facilities offer lower margins than other products, they should help drive the sale of higher margin equipment, such as aeration gear, Mr. Gunja notes.

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Growing Market Share

Ag Growth plans to increase its share of the bin market to 30 per cent from 10 per cent today, according to Jacob Bout of CIBC World Markets Inc. The analyst rates the shares "sector performer" and has a $50 price target on them.

Some caution is in order, however. Management warns that the road to international expansion will be bumpy. Many potential customers in developing markets face difficulty in getting credit, Mr. Anderson says, but notes that there are early signs that credit constraints are starting to lift in some regions. Canada's Export Development Corp., which offers insurance and financing to help Canadian firms expand overseas, has assisted with sales in emerging markets.

Ag Growth also faces rising material and transportation costs. In the case of the Nobleford plant, the company ships in steel from Hamilton, Ont., and reaches international markets via the port in Vancouver. Mr. Bout estimates that transportation accounts for about 7 per cent of total costs.

Management warns that margins could come under pressure this year. Gross margins slipped in the first quarter to 34.5 per cent from 39.3 per cent a year earlier, reflecting lower margins in the company's newly acquired units.

Robert Winslow, an analyst with Wellington West, says rising material costs will cause gross margins to shrink "modestly" this year, but expects them to be largely offset by stronger sales and cost controls. This month he raised his rating on the stock to "buy" from "market perform" and increased his price target to $50, up from $48.

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