Vertically integrated agricultural producer

Tonkens Agrar 6 June 2017 Initiation
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Tonkens Agrar

Vertically integrated agricultural producer

Food & beverages

Scale research report - Initiation

06 June 2017

Price

€6.85

Market cap

€12m

Share price graph

Share details

Code

GTK

Listing

Deutsche Börse Scale

Shares in issue

1.7m

Last reported net debt as at 31 December 2016

€17.6m

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 and photovoltaic installations. It farms c 3,000 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.

Profitability affected by commodity price fluctuations.

Low free float.

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Tonkens Agrar’s c 3,000 hectares of high-quality farmland in the Saxony-Anhalt region of Germany is the starting point for a vertically integrated agricultural production group. It processes the potatoes and onions grown on the farm in-house, substantially adding value to the harvested vegetables. Manure from the dairy herd and residual material from harvesting and processing crops is used to generate electricity, creating an additional revenue stream that is predictable and non-seasonal.

Good start to FY17

Revenue rose by 21% (€1.3m) year-on-year during H117 to €7.8m. Slightly over half of this increase can be attributed to crops from the harvest in H116 being stored for longer than usual and not sold until H216. In contrast, during H117 the harvest was sold significantly before the end of the period. Almost one-third of the sales increase was the result of unusually high potato prices. Profit before tax rose by 70% (€0.3m) to €0.8m and net profit by 85% (€0.3m) to €0.7m. Net debt increased by €0.7m during the period to €17.6m, resulting in high gearing (net debt/equity) of 165% at the period end.

More to come in H2

Noting initial successes in winning additional customers for the vegetable processing business and an improvement in farmgate milk prices, management expects the group to achieve a significantly improved profit in FY17 after two years of weak prices leading to losses before tax. Management also expects a further increase in revenues during FY17, with the rate of growth higher than the 5% achieved in FY16. Harvesting crops, vegetable processing and milk production are all expected to contribute to this growth.

Valuation: Scope for growth as milk prices recover

The shares are trading on multiples that are slightly above the mean for our sample of agricultural producers. However, we note that the shares are trading on only a modest (8%) premium to net asset value and that the current market capitalisation (€11.6m) is c 24% lower than the value of land and buildings at the end of December 2016, providing a rationale for the price stabilising at this level. Moreover, the Tonkens family, the majority shareholder, is purchasing stock to support the price. We see scope for share price improvement as farmgate milk prices recover further, driving an improvement in profitability.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

06/13

16.9

1.8

0.78

0.00

8.8

N/A

06/14

15.9

1.2

0.32

0.00

21.4

N/A

06/15

13.8

(1.2)

(0.43)

0.00

N/A

N/A

06/16

14.5

(2.0)

(0.99)

0.00

N/A

N/A

Source: Tonkens Agrar data

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.

Company description: German agricultural company

Tonkens Agrar is one of the largest German agricultural companies with a cultivated area of around 3,000 hectares of high fertility soil at four locations in the Saxony-Anhalt region of Germany. It 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 photovoltaic installations. The scale of operations means that logistics and sales capabilities are used efficiently.

Tonkens Agrar was founded in 1991 and listed on the Frankfurt stock Exchange in July 2010, when it raised €9.8m. It has grown through a sequence of acquisitions, as shown in Exhibit 1.

Exhibit 1: Group history

1991

Foundation of group with acquisition of c 1,000 hectares agricultural land in Saxony-Anhalt

1995

Purchase of Osterfelder Agrar with c 1,000 hectares of farmland and annual milk production of c 1.1m litres

1997

Purchase of Agrar- und Milchhof Stemmern with c 1,000 hectares of farmland and annual milk production of c 3.3 million litres

1998

Acquisition of the dairy and calf breeding company Hendriks with annual milk production of c 1.1m litres

2001

Formation of JV Bördelagerhaus, which has responsibility for storing and distributing products for the Tonkens Agrar group. The group has a 50% stake in Bördelagerhaus.

2003

Purchase of Weickelsdorfer Kartoffellagerhaus, which provides storage facilities at the Osterfeld site

2009

Formation of BIOGAS STEMMERN to participate in the energy generation market and formation of AMB Agrar Holding to acquire and manage shareholdings for the group

2010

Establishment of Tonkens Agrar and listing on Frankfurt Stock Exchange

2011

Completion of the first biogas plant at the Stemmern site

2012

Merger of Weickelsdorfer Kartoffellagerhaus and Osterfelder Agrar, and installation of two photovoltaic plants

2014

Commissioning of a new potato and onion peeling plant at Börde Vita in Wanzleben

2014

Completion of the second biogas plant at the site in Osterfeld

1991

1995

1997

1998

2001

2003

2009

2010

2011

2012

2014

2014

Foundation of group with acquisition of c 1,000 hectares agricultural land in Saxony-Anhalt

Purchase of Osterfelder Agrar with c 1,000 hectares of farmland and annual milk production of c 1.1m litres

Purchase of Agrar- und Milchhof Stemmern with c 1,000 hectares of farmland and annual milk production of c 3.3 million litres

Acquisition of the dairy and calf breeding company Hendriks with annual milk production of c 1.1m litres

Formation of JV Bördelagerhaus, which has responsibility for storing and distributing products for the Tonkens Agrar group. The group has a 50% stake in Bördelagerhaus.

Purchase of Weickelsdorfer Kartoffellagerhaus, which provides storage facilities at the Osterfeld site

Formation of BIOGAS STEMMERN to participate in the energy generation market and formation of AMB Agrar Holding to acquire and manage shareholdings for the group

Establishment of Tonkens Agrar and listing on Frankfurt Stock Exchange

Completion of the first biogas plant at the Stemmern site

Merger of Weickelsdorfer Kartoffellagerhaus and Osterfelder Agrar, and installation of two photovoltaic plants

Commissioning of a new potato and onion peeling plant at Börde Vita in Wanzleben

Completion of the second biogas plant at the site in Osterfeld

Source: Tonkens Agrar data

Exhibit 2: Revenues by segment FY16

Exhibit 3: Analysis of crop sales by revenue FY16*

Source: Tonkens Agrar

Source: Tonkens Agrar. Note: *Revenues for processed potatoes and onions of €0.77m are included in the warehousing and marketing segment.

Exhibit 2: Revenues by segment FY16

Source: Tonkens Agrar

Exhibit 3: Analysis of crop sales by revenue FY16*

Source: Tonkens Agrar. Note: *Revenues for processed potatoes and onions of €0.77m are included in the warehousing and marketing segment.

Business description

Tonkens Agrar currently operates from five sites close to the city of Magdeburg (Exhibit 4) and employs over 100 full-time staff.

Exhibit 4: Group composition

Subsidiary

Location

Activity

H117 revenue (€k)

H116 revenue (€k)

Agrar und Milchhof Stemmern and Milch und Zuchtbetrieb Hendriks

Stemmern

c 1,900 hectares, potato, cereals and onion cultivation, c 800 dairy cattle, 0.6MW biogas plant, 1MW photovoltaic power generation system

4,324

3,392

Osterfelder Agrar

Osterfeld
Weickelsdorf

c 1,100 hectares – cereal and maize cultivation, 0.6MW biogas plant, warehousing, processing and marketing of agricultural products

2,780

2,255

Bördelagerhaus

Wanzelben

1MW photovoltaic power generation system

67

96

Börde Vita

Wanzleben

Storage, processing and marketing of potatoes and onions

1,070

1,458

AMB Agrar Holding

Stemmern

Acquisition and management of shareholdings

N/A

N/A

Tonkens Agrar

Stemmern

Headquarters

157

135

Source: Tonkens Agrar data

Warehousing and marketing

Group activities

The group has warehousing capacity to hold around 40,000 tonnes of produce that has been grown within the group. The warehousing uses crates for storage. This gives good aeration and cooling, thus extending the time over which produce may be stored. The facilities also house equipment for processing vegetables.

Tonkens processes the vegetables: sorting potatoes and onions by size; cleaning and inspecting them; peeling the potatoes and peeling and chopping the onions; and packing the processed products in the units requested by the customer. The processes are fully automated to improve efficiency and capable of outputting up to 10,000 tonnes of peeled produce annually. Tonkens receives significantly higher margins for peeled products than for raw materials. In the medium term management intends to develop this activity further.

The produce is sold across Europe. The unprocessed potatoes are sold to specialised potato traders and potato processors. The peeled products are sold direct to the food processing industry, large caterers and food retailers.

Market

While demand for potatoes and onions is static, there is a steady shift in consumer preference from unprocessed vegetables to pre-prepared formats and ready meals. Tonkens’ revenues from the sale of processed vegetables declined during H117 because of high competitive pressure. Management addressed this through a marketing campaign. This has already met with success. Sales have increased since the period end. By January, output was almost at the 30 tonnes/day level required for the business to be profitable.

Agriculture

Group activities

Tonkens Agrar has over 3,000 hectares under cultivation. 13% of this land is owned by the group, the remainder leased or managed for other farmers. The two farms are in Saxony-Anhalt with the Stemmern farm in the Magdeburg region and the Osterfeld farm in the Leipzig region. Both farms benefit from soils that are highly fertile, have excellent structure and retain moisture well. The two farms each have their own staff and agricultural equipment as they are located 150km apart, so operate independently. The Stemmern farm is 12km away from Wanzelben, where storage and processing of produce takes place. The Osterfeld farm is 4km away from the Weickelsdorf vegetable storage and processing facility. Both the agricultural sites are large, enabling the use of highly efficient harvesters and other agricultural equipment. Note: while Agrarius has more land (c 5,000 hectares under cultivation, these are in Rumania and operated on a different business model, as Agrarius provides professional management services rather than owning or leasing the land. KTG Agrar, which cultivated 46,000 hectares in Germany and Lithuania, filed for insolvency in July 2016. The average farm size in Germany was 59 hectares in 2013 (source: Statistisches Bundesamt).

Market – potatoes

Almost half of Tonkens’ agricultural revenues are derived from the sale of potatoes to traders and potato chip manufactures in Germany and nearby countries, including the Netherlands and Switzerland. Demand for potatoes is static, but supply is very variable and dependent on weather conditions.

During H117, potato prices were high because of adverse weather conditions during the calendar 2016 planting and harvest season. The German potato harvest declined by 1.9% year-on-year (5% against a five-year average) as average yield per hectare fell by 1.4% year-on-year to 432 decitons/hectare. Despite losing 6% of its cultivated crop to a hailstorm in June, which was covered by insurance, Tonkens realised yields of 506.5 decitons/hectare compared with the state average of 426.5 decitons/hectare, reflecting the quality of the farmland under cultivation and its ability to retain moisture during dry periods. Management expects prices to remain high during H217 because of the poor harvest the preceding year, which has resulted in a scarcity of potatoes. The total planted area the group has allocated to potatoes during calendar 2017 has increased by 10% compared with the previous year to 20% of the total. The varieties planted have been selected for their suitability for processing elsewhere within the group (see above).

Market – grain

Exhibit 5: Medium-term supply and demand for grain globally

Source: International Grains Council

Grain prices are determined on a global level. Underlying demand is increasing slowly year-on-year, driven by a rising world population, a shift to an increasingly Westernised diet in China and other developing nations that requires an increasing quantity of grain for animal feed, and the use of grain for bio-fuel production. Supply is highly weather dependent, but has outpaced demand in recent years because of yield improvements, leading to several years’ accumulation of surpluses. In December 2016, the International Grains Council noted that the ratio of total grain stocks to use was around a 15-year high of 24%. This has led to a decline in grain prices. At the end of December 2016, producers in the Federal Republic of Germany were paid €148/tonne for milling wheat compared with €156 tonne a year previously and €130/tonne for feed wheat (€144/tonne). In a report published in December 2016, the International Grains Council predicted yield-related increases in output over the period to 2021/22 that do not keep pace with demand, leading to a small reduction in surpluses, which remain at a comfortable level. The scale of the surpluses is expected to keep grain prices subdued throughout the period, though in the middle of February 2017, wheat prices on the futures exchanges rose above €170/tonne for the first time in over a year because of concerns about the poor harvest in South Africa and South America.

Milk production

Group activities

Tonkens has around 800 dairy cows at its site in Stemmern, where it produces up to 20,000 litres of milk each day. The milk is sold on long-term contracts to a dairy plant in Stendal around 100km away. Tonkens achieves productivity per cow that is significantly higher than average for the state of Saxony: 8,700 litres/annum vs 8,200 litres/annum, achieved through careful herd management, carefully controlled feed regimens and modern stabling. Statistics published in 2014 noted that the average herd size in Germany was 221 cows (source: Statistik Berlin-Brandenburg).

Market

Demand for liquid milk in Germany is relatively static. Farmgate milk prices exhibit a cyclic pattern (Exhibit 6). When prices are high, famers raise output by increasing the number of cows in the herd and improving feed regimens. Once supply outstrips demand prices fall, but it takes time to bring supply and demand back into balance. At the bottom of the cycle, the price paid to farmers for milk is often below the cost of production. As a result, some of the less efficient and well capitalised farmers leave the industry at this point in the cycle, particularly if the low milk price occurs at a time when cereal prices are high. Consequently, the number of individual farms with dairy cattle has decreased over the last couple of decades (3% during CY16) and the average number of dairy cattle per farm has increased. This trend favours larger dairy units such as those operated by Tonkens Agrar.

Exhibit 6: Farmgate milk prices, Germany 2013-16

Source: Tonkens Agrar data

During H117 (ie the last six months of CY16), farmgate milk prices began to recover from a three-year low. Since November 2016, Tonkens Agrar has received more than the 30 cent/litre minimum it requires to be profitable (the average is 35c/litre). In addition, Tonkens increased output during H117 in order to benefit from a lower average cost of production per litre. This positive trend has continued into H217. Market experts expect the milk price to recover further in calendar 2017 and to settle in a range of 35-40c/litre. In the longer term, management has allocated capital to expand the dairy herd as there is sufficient capacity in the existing milking parlour to support this. However, management has not committed to this expenditure so far because milk production in Europe still exceeds supply, holding back price development.

Energy production

Group activities

The group operates two photovoltaic installations with a total rated power of 2MW and two biogas plants, each with an output of 600kW. The biogas plants use 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. The electricity output from the four plants is fed into the national grid. This provides a steady and predictable income, which gives the group greater independence from the impact of weather and fluctuating commodity prices.

Market

Since the German government is substantially reducing subsidies for biogas as solar energy, management does not intend to increase its renewable energy capacity.

Strategy

Tonkens Agrar’s strategy is based on four elements that combine to grow the group in a controllable manner. These are:

Enhancement of service portfolio: including warehousing, processing and marketing of vegetables. This is the priority for the group, as processed vegetables achieve a substantially higher margin than unprocessed vegetables.

Expansion of agricultural land: either through outright purchase or leasing. 20 hectares were purchased during H117.

Expansion of milk production: increase in capacity of cowsheds and number of dairy cows housed. As noted above, this programme is on hold.

Selective acquisition: either in the Magdeburg region itself or the surrounding area.

A review of the history of the group (Exhibit 1) shows this strategy in action.

Recent newsflow and upcoming catalysts

In a letter to shareholders at the end of April, management noted that the crops in the field were growing well, despite hailstorms after Easter and unusually dry conditions. In addition, the marketing initiative to drive sales of processed vegetables is beginning to deliver results.

Management, organisation and corporate governance

Supervisory board and management board

German listed companies typically have three corporate bodies – an annual general meeting of shareholders, a board of management (Vorstand) and a supervisory board (Aufsichtsrat). There is clear separation between management and supervisory functions in the two-tier board. The purpose of the supervisory board is to support the interests of shareholders, but also the interests of other parties including the company’s employees, and public interest. The supervisory board oversees the company’s board of management and appoints its members.

Supervisory board

The three members of the supervisory board are Chairman Dr Johannes Waitz, who is a lawyer based in Braunschweig; Deputy Chairman Horst Mantay, who is an auditor and tax consultant based in Berlin; and Bea Tonkens, who is married to the CEO, Gerrit Tonkens.

Management board

The management board comprises solely the CEO, Gerrit Tonkens. Mr Tonkens is a trained farmer who studied at the agricultural school in Groningen. From 1982 to 1991, he worked for Landbouwonderneming Tonkens BV in agriculture in the Netherlands, where he was responsible for operations. In 1991, he founded what was to become Tonkens Agrar with the purchase of a 1,000 hectare site in the Saxony-Anhalt region of Germany, becoming CEO when the group listed in 2010.

Shareholders and free float

The shareholder list is dominated by the Tonkens family holding. The family increased its holding slightly during H117 as it bought stock to support the share price. It has indicated that it is prepared to make further share purchases in future, if required.

Exhibit 7: Significant shareholders

Shareholder

Holding

Tonkens Holding GmbH

66.6%

Warburg Invest Kapitalanlageges

0.37%

Shareholder

Tonkens Holding GmbH

Warburg Invest Kapitalanlageges

Holding

66.6%

0.37%

Source: Bloomberg

Financials

Exhibit 8: Profitability FY11-FY16

Source: Tonkens Agrar data

Profit margins are volatile because of the exposure to commodity prices, particularly farmgate milk prices. During a substantial part of FY16, these were below the level at which Tonkens Agrar was able to generate a profit from producing milk. This is of particular concern because of the relatively high levels of bank debt and the corresponding size of interest payments (€0.9m FY16). Net debt has risen significantly over the last six years because of the level of investment in tangible assets (Exhibit 9) and the impact of two years of losses.

Exhibit 9: Capital expenditure and net debt FY11-FY16

Source: Tonkens Agrar data

Exhibit 10: Financial summary

€000s

FY14

FY15

FY16

H116

H117

Year end 30 June

HGB

HGB

HGB

HGB

HGB

Income statement

Revenue

15,920

13,762

14,479

6,432

7,764

Reported profit before tax

1,245

(1,174)

(1,951)

470

800

Net income

527

(719)

(1,641)

403

747

Reported EPS (€)

0.32

(0.43)

(0.99)

0.24

0.45

Dividend per share (€)

0.00

0.00

0

-

-

Balance sheet

Total non-current assets

24,278

27,526

28,661

28,159

29,296

Biological assets

881

920

968

949

967

Total current assets

10,242

9,241

10,207

10,186

9,345

Total assets

35,401

37,687

39,836

39,293

39,608

Total liabilities

(23,238)

(26,242)

(29,882)

(27,446)

(28,960)

Net assets

12,164

11,444

9,954

11,847

10,648

Shareholder equity

12,164

11,444

9,954

11,847

10,648

Net cash/(debt)

(12,671)

(17,743)

(16,950)

(18,423)

(17,621)

Cash flow statement

Net cash from operating activities

2,369

(184)

(434)

-

Net cash from investing activities

(6,147)

(4,153)

(3,250)

-

Net cash from financing activities

4,489

4,139

4,104

-

Net cash flow

711

(198)

420

-

Cash & cash equivalent end of year

2,537

(115)

305

-

Source: Tonkens Agrar accounts

Income statement

Revenue rose by 21% (€1.3m) year-on-year during H117 to €7.8m. Slightly over half of this increase was because in H116 the crops from the harvest were stored for longer than usual and not sold until H216, in the hope of achieving higher prices. In contrast, during H117 the harvest was sold significantly before the end of the period. Almost one-third of the sales increase is the result of unusually high potato prices, as discussed above. There was also a contribution from higher milk revenues, which was a combination of improved prices and higher volumes. These positive factors were partially offset by a reduction in revenues from vegetable processing.

Gross margin improved from 40.2% in H116 to 53.4% as the cost of materials dropped by 6% (€0.2m). This is because crops from the harvest were stored for longer than usual during H116. Personnel costs rose by 4% because of the impact of higher statutory minimum wages. Other operating expenses increased by 2%. Profit before tax rose by 70% (€0.3m) to €0.8m and net profit by 85% (€0.3m) to €0.7m.

Noting initial successes in winning additional business for the vegetable processing business and an improvement in farmgate milk prices, management expects the group to achieve a significantly improved profit before tax in FY17 after two years of weak prices leading to losses before tax. Management also expect a further increase in revenues during FY17, with the rate of growth higher than the 5% achieved in FY16. Harvesting crops, vegetable processing and milk production are all expected to contribute to this growth. This guidance is consistent with the German association of agricultural chambers, which expects an average of 42% to 58% improvement in the results of all German farms during the 2016/2017 harvest period, following two years that were characterised by a considerable loss of income.

Balance sheet and cash flow

Inventories increased by €0.6m during H117, reflecting the seasonal pattern of storing the harvest and then selling it. Fixed assets rose by €0.6m, following the purchase of 20 hectares of arable land, of which 14 hectares were at the Stemmern site, and six hectares at Osterfeld. Borrowings reduced by €0.5m to €19.2m as a loan was partially repaid. Net debt increased by €0.7m during the period to €17.6m. Gearing (net debt/equity) reduced slightly, from 170% at end FY16 to 165%. The debt is secured by a mortgage on the land. Details of any bank covenants, if any, are not disclosed. While management has stated that it is keen to expand vegetable processing activities, this is unlikely to be required in the short term, as the group is still in the process of ramping up volumes to use existing capacity efficiently. As noted, plans for expanding the dairy operation are on hold and there is no intention to expand the renewable energy operations in the current regulatory environment.

Valuation

The shares are trading on multiples that are slightly above the mean for our sample of agricultural producers. However, we note that the shares are trading on only a modest (8%) premium to net asset value and that the current market capitalisation (€11.6m) is c 24% lower than the value of land and buildings at the end of December 2016, providing support at current levels. Moreover, the Tonkens family, the majority shareholder, are purchasing stock to keep the price up. We see scope for share price improvement as farmgate milk prices recover further, driving an improvement in profitability.

Exhibit 11: Peer group comparisons

Company

Market cap

€m

Historical

EV/sales

Historical EV/EBITDA

Austria Technologie & Systemtechnik

368.1

0.9x

5.7x

AgroGeneration

37.1

1.3x

4.1x

Agroliga Group

30.0

1.9x

8.5x

Agromino

355.4

9.2x

77.0x

Borges Agricultural & Industrial Nuts

72.4

1.6x

77.8x

FirstFarms

36.3

3.3x

17.3x

Kre.Ka

0.5

0.9x

96.3x

Produce Investments

61.4

0.4x

4.2x

Societa per la Bonifica dei Terreni Ferraresi e Imprese Agricole

184.3

20.3x

44.2x

Mean

1.5x

29.9x

Tonkens Agrar

11.5

2.0x

33.1x

Source: Bloomberg. Note: Prices at 16 May 2017. Grey shading indicates exclusion from mean.

Sensitivities

Weather: like all agricultural stocks, Tonkens Agrar’s performance is affected by climactic conditions. Too much or too little rain, hail and frost can all damage growing crops.

Agricultural commodity prices: the farmgate prices paid for milk, grain and vegetables are determined by the balance between supply and demand, which is cyclical in nature. These are basic commodities, so Tonkens has minimal ability to modify the output and command higher prices. Processing the vegetables provides a mechanism for moving away from commodity pricing.

Regulatory issues: the group is exposed to changes in the EU Common Agricultural Policy and legislation such as the EU Nitrates Directive, which will enter into force in the second half of 2017 and will lead to considerably greater documentation costs for German farmers. Legislation affecting the levels of subsidy for renewable energy also have a significant impact.

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