Back to the black

Tonkens Agrar 7 December 2018 Update
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Tonkens Agrar

Back to the black

Food & beverages

Scale research report - Update

7 December 2018

Price

€5.25

Market cap

€9m

Share price graph

Share details

Code

GTK

Listing

Deutsche Börse Scale

Shares in issue

1.66m

Net debt (€m) end-June 2018

16.6

Business description

Tonkens Agrar is engaged in the cultivation of crops including cereals, potatoes, onions and oil seed rape; the storage, processing and marketing of vegetables; milk production; and the production of renewable energy from biogas plants that run on waste produced by the group and from photo-voltaic installations. It farms c 3,500 hectares of high-quality land in the Saxony-Anhalt region of Germany.

Bull

Demand for agricultural staples relatively unaffected by economic conditions.

Demand for agricultural produce supported by rising global population.

Vegetable processing improves margins.

Bear

Output affected by weather conditions and pests.

Demand for agricultural produce supported by rising global population.

Low free float (30.7%).

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Improved farmgate milk prices and higher volume sales of processed vegetables enabled Tonkens to achieve its stated goal of reporting a net profit after tax for FY17/18, compared with a loss the previous year. However, persistently low potato prices prevented the group from meeting its expectations of year-on-year revenue growth. Management continued with its strategy of focusing on higher-margin, added-value business, with volumes of peeled and packaged produce rising by 23% year-on-year.

Low arable yields depress FY17/18 revenues

Group revenues reduced by 6% year-on-year during FY17/18 to €14.5m. A modest improvement in revenues from milk production related to improved farmgate milk prices and higher volume sales of processed potatoes and onion was more than offset by low yields of cereal crops and oil-seed rape, resulting from unfavourable weather conditions during the calendar 2017 harvest. The cost of materials as a percentage of revenues increased by 2.3pp to 49.2%. Personnel costs were unchanged. The group moved from a €0.9m loss before tax to a €0.8m profit. This was partly the result of higher potato stocks at the year-end, partly a €0.9m uplift in other income, which benefited from the sale and leaseback of property and reversal of provisions. Net debt reduced from €17.7m at end-June 2017 to €16.6m, cutting gearing from 193% to 171%.

Further profit growth possible in FY18/19

Management notes that while the poor growing conditions during calendar 2018 resulted in a poor harvest, this effect is balanced by price increases for grains, onions and potatoes. In addition, the summer drought has pushed farmgate milk prices up, while Tonkens is protected from feed cost increases by using home-produced maize for feeding its dairy herd. If its potato marketing initiatives are successful, management expects to deliver an increase in both revenues and profits at group level during FY18/19.

Valuation: Trading at a discount to net assets

Financial summary

Year
end

Revenue
(€m)

PBT
(€m)

PAT
(€)

DPS
(€)

P/E
(x)

Yield
(%)

06/15

13.8

(1.2)

(0.7)

0.0

N/A

N/A

06/16*

14.8

(2.0)

(1.6))

0.0

N/A

N/A

06/17

15.3

(0.9)

(0.8)

0.0

N/A

N/A

06/18

14.5

0.8

0.5

0.0

15.6

N/A

Source: Company data. Note: *restated for BilRuG.

The shares have risen from €4.64 since the full-year results were announced. They are currently trading on a historical EV/sales multiple that is above the mean for our sample of agricultural producers and a historical EV/EBITDA multiple that is below the mean. We note that at current levels the market capitalisation (€9m) is substantially below both the reported net asset value (€9.7m) and the reported value of land and buildings at the end of June 2018 (€13.7m).

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Divisional analysis

Tonkens Agrar’s c 3,500 hectares of high-quality farmland in the Saxony-Anhalt region of Germany is the basis for a vertically integrated agricultural production group. It peels and chops the potatoes and onions grown on the farm in-house, adding value to the harvested vegetables. Manure from the dairy herd and residual material from harvesting and processing crops are used to generate electricity, creating an additional revenue stream that is relatively predictable and non-seasonal. Some of the maize grown on the farm is used as cattle feed, providing a buffer against rising feed prices.

Warehousing and marketing (36% FY17/18 revenues)

Volumes of peeled and packaged potatoes and onions increased by 23%. Output benefited from successful marketing initiatives which enabled the business to meet its target of peeling 30 tons of vegetables a day over a longer period of time. However, the comparatively low prices realised for finished goods resulted in a €0.2m year-on-year decline in segmental revenues during the year ended-June 2018 to €5.2m. Management remains focused on improving capacity utilisation, and thus profitability, by attracting additional larger customers.

Milk production (24% FY17/18 revenues)

Segmental revenues increased by €0.4m year-on-year to €3.5m. This was primarily the result of a positive movement in farmgate milk prices. These rose from 22c per litre, below the cost of production, in July 2016 (start of H116/17), to peak at 40.21c per litre in November 2017 (mid-H117/18), before dropping to 31.81c per litre by May 2018.

Agriculture (22% FY17/18 revenues)

Segmental revenues declined by €1.8m year-on-year to €3.1m. Although Tonkens outperformed nationwide average crop yields for winter wheat, winter barley, oil-seed rape and potatoes, it reported lower yields year-on-year for all crops apart from potatoes. This volume decrease was caused by unfavourable weather conditions, with the harvest repeatedly interrupted by rain. Cereal prices attracted only a modest premium compared to the prior year until concerns about the harvest in the EU and elsewhere started to push wheat prices up. Oilseed rape prices were lower than the previous year and oversupply of potatoes resulted in extremely low prices for unprocessed potatoes that were below the cost of production

Renewable energy (15% FY17/18 revenues)

The segment generated €2.2m revenues, which was similar to the prior year. Management does not intend to expand this segment because of the uncertainty regarding subsidies for electricity produced from either biogas or solar panels. The activity is retained because the biogas plants represent a mechanism for generating a steady and predictable income from the residual materials from both agricultural production and vegetable processing, as well as manure from the dairy herd. The waste product from the biogas plants, a mash, is used as a fertiliser on the group’s farmland, reducing the amount that needs to be purchased.

Valuation

The shares have risen from €4.64 since the full-year results were announced. They are currently trading on a historical EV/sales multiple that is above the mean for our sample of agricultural producers and a historical EV/EBITDA multiple that is below the mean, reflecting Tonkens’ higher EBITDA margin. We note that the current market capitalisation (€9m) is substantially below both net asset value (€9.7m) and the value of land and buildings at the end of June 2018 (€13.7m).

Exhibit 1: Peer group multiples

Company

Market cap (€m)

Reported EV/sales (x)

Reported EV/EBITDA (x)

Reported EBITDA margin (%)

Agrogeneration

15.5

1.08

-

-

Agromino

28.2

9.48

70.79

13.4

Austria Technologie & System

711.0

0.93

3.93

23.5

Firstfarms

38.1

2.27

27.43

8.3

Kre.Ka

0.2

0.98

-

-

Produce Investments

57.3

0.48

7.57

6.4

Mean

1.15

12.98

Tonkens Agrar

8.3

1.72

6.78

25.4

Source: I/B/E/S data, company data. Prices at 4 December 2018. Grey shading indicates exclusion from mean.

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This report has been commissioned by Tonkens Agrar and prepared and issued by Edison, in consideration of a fee payable by Tonkens Agrar. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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