Warsaw Stock Exchange: IMC S.A. (WSE:IMC) - Company Update
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Company Update
Agriculture Ukraine
The changes in the East…
In this report we revise financial forecasts and valuation for IMC upgrading recommendation from Sell to Buy and raising target price to PLN 22.56 p.s. As in the case of our previous company update published in July, the assumptions with respect to cost of equity has the greatest impact on the final valuation as well, but this time the change is positive. We still assume 10Y Ukraine’s RFR at 30% in 2023, 20% in 2024 and 10% thereafter, whereas risk premium is equal to 20% in 2023 and 10% later on. We moved, however, DCF model forecast period from 2022-2028 to 2023-2029, which under high discount rate scenario supports higher valuation. The latest positive newsflow regarding counteroffensive on Kharkiv front and opening Kherson front give hopes for faster and favourable for Ukraine end of war, which in our view is supportive of geopolitical premium decline. Nonetheless, given the evolution of events in Ukraine, interests of broadly defined sides of the conflict, the ever-changing macro including energy commodities supply crunch, the realization of scenario other than we assumed is highly likely.
From the point of view of cash flow generation, we have no reason to considerably change our previous assumptions compared to July’s company update, in spite of unblocking Black Sea ports. According to the press reports, so far the additional volumes sold via recently open ports by listed Ukrainian agri companies are rather marginal. This is chiefly due to the high discount offered by global traders for Ukrainian grains, which may stem from higher insurance costs, additional 7 to 9 days associated with security clearance in Istanbul, as well as premium for companies engaged in war-torn areas. Applying discounted prices to calculation of profit on biological assets revaluation led to the 2Q22 miss on results vs. our forecast. Nonetheless, the impact was of purely accounting nature, and given the low sales volumes had limited impact on cash flow/valuation as well.
Forecasts and valuation update
Financial forecasts update
In this report, we change our financial forecasts for IMC mainly due to the miss on reported results in 2Q22. As we mentioned many times, financial results in 2022, and 2Q22 in particular, are mainly made on profit on biological assets revaluation and in the environment of limited export, the result on sales will carry over to 2023. The profit on biological assets revaluation, in turn, is based on effective price commanding a discount to market prices, which stem from the problems of Ukrainian grain export. Based on our assumptions regarding low volumes sales all the way through the end of 2022 and much higher 2023 sales, poor price conditions nowadays and lower profit on revaluation has little impact on the final valuation of IMC (except for time value of money, which in the environment of high interest rates and risk premias, distort considerably discounted cash flows).
After pushing out Russian from Poltawa, Sumy, Czernichov and Charkow region, the key problems of Ukrainian agri companies remained export disruptions. On July 22, 2022, Russia, Ukraine, Turkey and UN signed Istambul agreement, which guarantee safe marine grain export from Ukrainians ports on Black Sea. The aim of said agreement was to reduce the price pressure on global grains market and prevent the famine affecting the poorest countries in the world. The agreement is set to last for 120 days with potential for renewal. In September, Russia’s president Vladimir Putin stated that, contrary to provisions of the agreement only 2 of 87 ships headed to poor countries whereas the vast majority ended up in Europe, an opinion later corroborated by Turkish president Erdogan. Interesting solution to the possible withdrawal of the deal, is the recent proposal of UN which tries to broker a deal, enabling resumption of Russian ammonia export through the port in Odessa. After the war broke out, the pipeline linking Russian ammonia plants with port in Odessa has been shut down.
The opening of Ukrainian ports in July 2022 enabled export of agri produce to step up to 4.5mn tons in August from 2.7mn month earlier. According to Ukraine’s Minster of Agriculture, export of agri produce may increase to 6-6.5mn tons in October. However, according to Reuters that target seems challenging, considering that not all shipping group are keen to send their ships into the warzone. The additional problem posed by the maritime export of grains from Ukraine are trade terms, which are offered to agri companies. Due to insurance prices, extra 7 to 9 days for security clearance in Istambul, and risk premia for shipowners, the price offered for Ukrainian agri produce is too low to justify higher export.
We continue to assume that IMC’s sale of grains between 3Q22 and 4Q22 will amount 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 the beginning of 2023, 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. We emphasize that the complete unblocking of Ukrainian ports may not be tantamount to ending of the 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.
It’s worth to mention that positive EBITDA result, which we believe IMC will report in 2022 r. stems mostly from positive revaluation of biological produce, which in the largest extent happened 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 in 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 22.56 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 32.70.
The details of our valuation and forecasts are available in the full version of this report.
Financial forecasts
