Argiculture Stocks: WSE - (IMC) IMC S.A. – Forecast And Valuation
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Company Update Agriculture Ukraine 5 July 2022
IMC S.A.
In this report we resume coverage for IMC revising financial forecasts and valuation of the company. According to the auditor’s opinion, the recently reported results for 2021 give a true and fair view of IMC’s financial position, though indicate the material uncertainty with regard to its ability to continue as going concern. In our view, it’s currently impossible to predict how the war in Ukraine will unfold, therefore following report, including financial forecasts, corresponds to one single scenario, which assumes military activities do not come back to Ukraine’s regions where IMC runs its business. Nonetheless, given the evolution of events on the front, interests of broadly defined sides of the conflict, the everchanging macro including energy commodities supply crunch, the realization of scenario other than we assumed is highly likely.
In addition to changes of assumptions which pertain purely to operational activity (sales volume, prices), our valuation required updating the assumptions with respect to cost of capital, stemming from sharp increase of Ukrainian 10Y bond yields (from 7% previously to 30% in 2022-23) as well as equity risk premium (from 8% previously to 20% in 2022-23, later 10%). It’s the change of cost of capital which is responsible for the largest drop in IMC DCF valuation, compared to September 2021 report.
For the purpose of this report we assume the scenario in which Ukrainian ports are blockade is lifted only in 2023 r., therefore we see heavily limited IMC’s sales volumes until the end of current year. The financial results we expect IMC to deliver in 2022 r. stems from gain on changes in fair value of biological assets and is accounted for on the accrual basis. For 2023 onward, we expect the company to be able to sow 100% of its bank land after clearing-up and neutralization of mines on some 27% of company’s fields.
We’d like to reiterate and accentuate one more time, that our assumptions represent one, specific scenario with regard to the situation in Ukraine and we see some considerable risks on both sides of our valuation. Lifting blockade of Ukrainian ports, which may not be tantamount to end of war, would improve IMC’s cash flows. On the other side, breaking through the frontline by the Russians could lead to additional disruptions in grains export and therefore lower valuation vs. our target price.
Forecasts and valuation update
Financial forecasts update
In this report, we change our financial forecasts for IMC mainly due to the update of underlying assumptions with respect to grains prices, land area sown and sales volumes.
After pushing out Russian from Poltawa, Sumy, Czernichov and Charkow region, the key problems of Ukrainian agri companies are export disruptions. Still, Russian fleet controls Black Sea whereas drifting mines pose additional threat for vessels. Rail transport is insufficient due to the limited capacity, high unit costs and competition from the side of metallurgical products representing considerable part of Ukrainian export.
In March Ukraine exported merely 0.35kt of grains. In May export went up to 1.7mn and further 2mn in June, which constitutes only 50% of pre-war base level. On top of that, there is around 20mn of grain stockpiles from previous years which pose additional problem.
We assume that IMC’s sale of grains between 2Q22 and 4Q22 will reach ca. 20kt per month compared to 60kt per month pre-war. It will cause considerable drop in sales revenues, sharp rise of inventories on the balance sheet and as a consequence limited cash inflow. Our scenario assumes that from 2023 on, blockade of Ukrainian ports will be lifted and IMC will be able to export current production and accumulated inventories as well. We point out that there are risks on both sides to our base scenario. For instance the pressure from the largest grain importers such as Turkey makes lifting ports blockade more likely, and that scenario may not be tantamount to the end of war. On the flipside, if Russia decides to not make any concessions toward other countries, at some point in the future, limited sales of Ukrainian companies may lead to solvency issues and limited sowing campaign in 2023.
In the aftermath of war breakout global grain prices soared by 70% to settle at 30- 40% higher vs. pre-war level. From the point of view of USDA forecasts, wheat market was supposed to fare better compared to corn due to the expected inventories drop. In case of corn, the US agency expected the record high harvest in Brazil and China’s greater self-sufficiency, which so far has not found confirmation in reality. Current grains prices movement shows the opposite (strong corn, weak wheat), which may stem from higher harvest in many countries, start to harvest season in general and concerns about economic growth. Compared to our September 2021 report we assume ca. 40% of benchmark prices growth. Unfortunately, due to the export disruptions price realization in IMC may deviate considerably form the official benchmark price. The discount may stem, among other things, from higher shipping costs, since the cargo now have to travel by rail through Poland, Romania or Hungary and further to the final off-taker.
In spite of Russia’s defeat on Czernichov front, IMC sowing campaign on the entire land bank was impossible due to the presence of mines and explosives left on site after military activities. According to the official statement, IMC managed to sow ca. 73% of its land bank, which in our view will lead to 30% production during drop in 2022 harvest season. Certainly, it will have negative effect on sales in the next year, which on the other side will be made up for by sales from inventories gathered throughout 2021/2022.
It’s worth to mention that positive EBITDA result, which we believe IMC will report in 2022 r. stems from positive revaluation of biological produce, which in the largest extent will happen in 2Q22. We emphasize that 2022 EBITDA profit will stem from accrual accounting rules and is not tantamount to cash flows, which better reflect IMC financial position. Considerable EBITDA profit in 2022 will be accompanied by high inventories growth, which in turn will be reflected in the balance sheet’s low cash position visible at the end of 2022. Along with lifting blockade of Ukraininan ports and selling from the stocks, the situation of company’s book in 2023 will be opposite – standard EBITDA level will be accompanied by very high cash influx due to selling from inventories.
Valuation Our DCF model indicates a 12M target price of PLN 13.33 per share. We attach 100% weight to this valuation method as it better captures the long-term prospects, company-specific factors and country risk. For illustrative purposes, we have prepared a peer comparison valuation based on 2022E - 2024E multiples which yields a 12M valuation of PLN 33.36. The details of our valuation and forecasts are available in the full version of this report.
Financial forecasts
Krzysztof Kozieł, CFA
krzysztof.koziel@pekao.com.pl
