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Key US market unaffected by COVID-19 thus far

ArborGen Holdings 16 April 2020 Update
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ArborGen Holdings

Key US market unaffected by COVID-19 so far

Year-end and

COVID-19 update

Basic materials

16 April 2020

Price

NZ$0.17

Market cap

NZ$85m

NZ$/US$0.61

Net debt (US$m) at 30 September 2019

31.6

Shares in issue

499.9m

Free float

53%

Code

ARB

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.9)

(14.1)

(14.1)

Rel (local)

(8.1)

(2.8)

(16.1)

52-week high/low

NZ$0.20

NZ$0.14

Business description

ArborGen is an NZX-listed investment company and is the world’s largest integrated developer, commercial manufacturer and supplier of advanced forestry seedlings with operations in the US, Brazil and Australasia.

Next events

FY20 results

TBC

Analyst

Toby Thorrington

+44 (0)20 3077 5721

ArborGen Holdings is a research client of Edison Investment Research Limited

ArborGen’s US sales appear to have fared well in H220 as management has reaffirmed guidance for FY20. While we are aware of COVID-19 risks – which will continue to be monitored – the seasonal H2 bias to dominant US sales along with current customer planting intentions suggest no reason to change the FY21 outlook for now. Consequently, our estimates are unchanged and show good year-on-year progress for both FY20 and FY21, generating low earnings multiples at the current share price.

Year end

Revenue (US$m)

EBITDA** (US$m)

PBT*
(US$m)

EPS*
(c)

P/E
(x)

EV/EBITDA**
(x)

03/19

49.1

4.6

4.7

1.1

10.1

13.3

03/20e

58.2

7.7

7.1

1.5

7.1

10.3

03/21e

64.4

10.1

9.5

1.9

5.6

7.7

03/22e

71.7

12.5

12.2

2.4

4.4

5.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. No tax charge is anticipated in our estimates. **US GAAP.

Limited COVID-19 impact on FY20 and outlook so far

A year-end trading update refined guidance for FY20 pre-central cost US GAAP EBITDA to ‘at least 40% higher’ than last year’s US$6.1m. The minimum implied US$8.6m compares to our existing US$9.2m, so a difference of US$0.6m or less at this level, subject to final audit. Our group EBITDA estimate of US$7.7m in the above table is after US$1.5m central costs; the reported H120 equivalent was a US$4m loss and the swing to full-year profitability provides a clear sense of both the (H2 FY) seasonality of the US seedling lifting/planting season and the scale importance of this geographic region. There was clearly no material COVID-19 impact on the FY20 outturn. Current indications are that customers are committed to their 2020/21 planting programmes. ArborGen has already implemented appropriate COVID-19 working practices across its sites, all of which are continuing to operate, and is taking a prudent stance on discretionary cost and capex items.

Planting rates in Brazil – which has a more evenly spread seedling selling season – are said to have slowed moderately for now to accommodate revised COVID-19 working practices. Separately, a third eucalyptus nursery lease has been taken on, this time in Mato Grosso du Sul state to take internal annual eucalyptus seedling production capacity up to in excess of 30m at full run rate (total network capacity including pine seedlings is c 100m). Previous company comments that New Zealand nursery operations were continuing to cultivate seedlings for FY21 sale (and operate quarantine services) but also complying with national government lockdown guidance remain valid.

Valuation: Financial headroom and low multiples

No comment was made on the group core net debt position; our unchanged model anticipates a c US$28m position at the end of FY20 (versus US$31.6m at the H120 stage) and, as our previous note pointed out, the company has facilities in place with funding capacity in excess of US$40m. On unchanged estimates, ArborGen’s share price generates mid-single digit P/E multiples with EV/EBITDA (US GAAP) declining from 10.3x for FY20 to 5.9x by FY22 based on our model.

Exhibit 1: Financial summary

US$m

2018

2019

2020e

2021e

2022e

Year end 31 March (from 2018 onwards)

6m to March

IFRS 16

IFRS 16

IFRS 16

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

35.4

49.1

58.2

64.4

71.7

Cost of Sales

 

 

(19.4)

(30.3)

(36.2)

(40.1)

(44.5)

Gross Profit

 

 

16.0

18.8

22.0

24.3

27.2

EBITDA - US GAAP

 

 

6.0

4.6

7.7

10.1

12.5

EBITDA - NZ IFRS

 

 

6.2

9.8

12.2

14.8

17.3

Operating Profit (before GW and except.)

 

 

5.0

6.9

9.2

11.8

14.3

Intangible Amortisation - acquired

 

 

(2.6)

(5.8)

(5.8)

(5.8)

(5.8)

Exceptionals

 

 

(1.4)

(3.6)

(2.8)

0.0

0.0

Associate

 

 

0

0

0

0

0

Operating Profit

 

 

1.0

(2.5)

0.6

6.0

8.5

Net Interest

 

 

(1.4)

(2.2)

(2.2)

(2.3)

(2.2)

Profit Before Tax (norm)

 

 

3.6

4.7

7.1

9.5

12.2

Profit Before Tax (statutory)

 

 

(0.4)

(4.7)

(1.5)

3.7

6.4

Tax

 

 

2.6

0.5

0.4

0.0

0.0

Minorities

 

 

0

0

(0)

0

0

Discontinued

 

 

0

(0.1)

0.0

0.0

0.0

Profit After Tax (norm)

 

 

6

5.2

7.5

9.5

12.2

Profit After Tax (statutory)

 

 

2

(4.2)

(1.1)

3.7

6.4

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

487.9

496.9

499.3

499.9

499.9

EPS - normalised (c)

 

 

1.3

1.1

1.5

1.9

2.4

EPS - statutory (c)

 

 

0.5

(0.8)

(0.2)

0.7

1.3

Dividend per share (c)

 

 

0.0

0.0

0.0

0.0

0.0

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

45.2

38.4

37.8

37.8

37.9

EBITDA Margin (%)

 

 

17.5

20.0

21.0

23.0

24.2

Operating Margin (before GW and except.) (%)

 

 

14.1

14.1

15.9

18.3

20.0

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Fixed Assets

 

 

156.0

152.3

154.2

150.0

145.9

Intangible Assets

 

 

106.7

105.6

104.0

102.6

101.3

Tangible Assets

 

 

43.3

42.7

48.2

45.4

42.6

Investments

 

 

6.0

4.0

2.0

2.0

2.0

Current Assets

 

 

57.8

41.7

49.1

54.6

61.0

Stocks

 

 

24.8

29.4

33.2

37.7

42.9

Debtors

 

 

10.0

9.1

10.5

11.5

12.6

Cash

 

 

23.0

3.2

5.4

5.4

5.4

Current Liabilities

 

 

(36.2)

(15.8)

(27.6)

(26.3)

(23.3)

Creditors

 

 

(20.4)

(15.0)

(16.3)

(17.2)

(18.2)

Short term borrowings

 

 

(15.8)

(0.8)

(11.3)

(9.1)

(5.1)

Long Term Liabilities

 

 

(26.2)

(30.6)

(30.3)

(29.2)

(28.1)

Long term borrowings

 

 

(22.8)

(16.5)

(23.9)

(23.9)

(23.9)

Other long term liabilities

 

 

(3.4)

(14.1)

(6.4)

(5.3)

(4.2)

Net Assets

 

 

151.4

147.6

145.4

149.1

155.5

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

3.5

4.1

6.1

10.9

12.8

Net Interest

 

 

(1.4)

(2.1)

(2.2)

(2.3)

(2.2)

Tax

 

 

0

0

0

0

0

Capex

 

 

(3.0)

(6.6)

(20.4)

(5.4)

(5.5)

Acquisitions/disposals

 

 

0.9

(7.6)

0

0

0

Financing

 

 

0

0

0

0

0

Dividends

 

 

0

0

0

0

0

Net Cash Flow

 

 

0

(12.2)

(16.4)

3.3

5.1

Opening net debt/(cash)

 

 

33.0

9.6

9.8

27.8

25.6

HP finance leases initiated

 

 

0

0

(1.1)

(1.1)

(1.1)

Other

 

 

23.4

0

(0.4)

0

0

Closing net debt/(cash)

 

 

9.6

21.8

27.8

25.6

21.6

Source: ArborGen, Edison Investment Research. Note: 2017R was restated to show discontinued operations separately. Significant other items in 2017R and 2018 cash flow relate to M&A activity associated with the disposed Tenon operations. **FY20 opening net debt has been restated to exclude IFRS 16 leases (which are now shown at projected year ends); the group’s purchase of its US head office property in August 2019 moved this from a leased asset to an owned one.

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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