The second stock on our watch-list is one that goes by the name Alliance Grain Traders [AGT:TSX]. Our previous write-up outlined the fundamentals behind a successful Canadian non-prime mortgage lender called Home Capital Group [HCG:TSX].
Company Background
According to its website, this Saskatchewan based company “is the largest lentil and pea splitting company in the world.” The core business of Alliance Grain Traders is supplying customers with premium quality Red Split and Football Lentils, Kabuli Chickpeas, Laird/Eston/Richlea Lentils, Yellow Split and Whole Peas, Green Split and Whole Peas, Whole and Split Desi Chickpeas, Navy Beans, Pinto Beans, Dark and Light Kidney Beans, Black Beans, White Beans, Faba Bean and other specialty crops such as canary seed.
To serve its global customer base in the Americas, Europe and Asia, the company operates 20 production facilities in Canada, the United States, Australia and Turkey that clean, split, sort and bag its line of pulse products. With it’s facilities in Turkey, Alliance Grain Traders also offers beans, rice, milled durum wheat and bulgur products. In addition, through the Arbella brand, Alliance Grain offers a full line of packaged pasta products for the domestic Turkish market as well as for export.
Alliance Grain Traders Global Operations
In April 2010, Alliance Grain Traders completed an equity issue for 2,500,000 common shares for gross proceeds of $80,000,000 ($76,675,000 net). In the conference held on May 18, 2010, President and CEO Murad Al-Katib was asked how he was going to spend this fair chunk of change. His answer is as follows:
… You’re going to see the bean side focused very much on some further expansion in North America. That’s our original 12-month focus, so expect North Dakota or the US in general, North Dakota, Minnesota to be a potential focus for us to expand the reach that we‘ve started with the Parent Seeds acquisition and the dry edible beans and sunflower seeds.
On pasta, it’s simply an expansion of the Arbela capacity. We added line number four last year at the acquisition time, and I’m happy to report to the shareholders that 2009 year-end, we totalled up 46 countries of export for Arbela and so with that long-cut demand for spaghetti and fettuccini driving further shortcut demand for penne, rotini and other types of pasta, we need more capacity on the pasta side. So we will be adding line number five into that over the next six-month cycle.
On rice, we leased a mill in the Thrakien region of Turkey to take Turkish origin patty rice and convert it into white rice and make it 500 gram packs. And we are looking at both build versus a buy decision in the Thrakien region of Turkey, to establish a permanent processing presence in rice. And you’re also going to see us taking a look at both Australia and India to further look at our lentil platform globally, in lentils and chickpeas, where we’re looking at those two origins as providing us further growth in Australia and South Australia near Adelaide.
| Shares Outstanding (fully diluted) | 19.603 million |
| Price (as of 3:58 PM ET May 28, 2010) | 33.36 |
| Market Capitalization | 653.956 million |
| Annual Dividend/Yield | 0.54 cents/1.619 |
| 52 Week High/Low | 35.40/14.02 |
| P/E Ratio (ttm) | 12.17 |
Results for Q1/10 are as follows:
- Net income for the three months ended March 31, 2010 was $16.8 million or $0.98 per share ($0.96 on a diluted basis) compared to $15.2 million for the three months ended December 31, 2009 or $0.89 per share ($0.87 on a diluted basis) and $7.2 million for 3 months ended March 2009 or $0.90 per unit ($.84 on a diluted basis).
- Consolidated sales for the three months ended March 31, 2010 were $186.3 million, compared to sales of $154.8 million for the three months ended December 31, 2009 and $86.8 million for the three months ended March 31, 2009. The increase in sales was a result of acquisitions. In addition, Arbel Group sales were bolstered by a tender award of the Turkish Grain Board for 20,000 metric tonnes awarded in the three months ended March 31, 2010 and accounting for approximately $14.5 million.
- EBITDA ((Earnings Before Interest, Income Taxes, Depreciation and Amortization)) for the quarter ended March 31, 2010 was $21.9 million, compared to EBITDA of $22.4 million for the quarter ended December 31, 2009 and $10.9 million for the quarter ended March 31, 2009. In absolute terms, EBITDA was relatively flat, however when examining EBITDA as a percentage of sales, March 31, 2010 showed a decline over December 31, 2009. The decrease in EBITDA as a percentage of sales from the quarter ended December 31, 2009 was due in part to lower margin sales executed during the first quarter of 2010, including international tender awards by the Turkish Grain Board and United Nations Agencies.
- Capital expenditures to March 31, 2010 were $4.2 million in Canada and included enhancements to building, equipment and vehicles at facilities in Canada, the United States, Turkey and Australia.
| Results | Q1/2010 | Q4/2009 | Q1/2009 |
| Net Income | $16.8 million or $0.98 per share ($0.96 on a diluted basis) | $15.2 million or $0.89 per share ($0.87 on a diluted basis) | $7.2 million or $0.90 per unit ($.84 on a diluted basis) |
| Consolidated Sales | $186.3 million | $154.8 million | $86.8 million |
| EBITDA | $21.9 million | $22.4 million | $10.9 million |
Geographic & Product Diversity
Alliance Grain Traders is a dominant global leader in pulse processing and distribution. Pulses are the seeds of legumes and include lentils, peas, chickpeas ans bean crops. They are considered a high quality protein and fiber source. In total, they provide about 10% of the total dietary protein in the world. According to the Food and Agriculture Organization of the United Nations (FAO) pulses currently account for ~90% of food consumption in developing countries. The FAO estimates annual growth of 6% in the consumption of pulses. Aside from human food consumption, pulses are also used as bio-diesel fuels, alternative energy sources, feed for livestock and are a vital component of crop rotation, helping reduce nitrogen costs by naturally fixing soil nitrogen.
Global Production and Consumption of Pulses
Pulses aside, the company is also involved in milled wheat (pasta, semolina, bulgur), rice and other products such as popcorn and sunflower seeds.
As a result of having facilities in four of the world’s top producing countries for lentil and pulse crops, Alliance Grain Traders also has the benefit of taking advantage of rotating new crop origins as harvest periods come on stream at different times in different countries . The harvest season in Canada and the United States usually occurs in August/September, whereas the same is true for Australia in November/December. The Indian harvest season occurs in March and Turkey rounds out the harvest in May/June.
Macro Outlook
Despite the global economic outlook, as global populations in developing countries continue to enhance their standard of living, the demand for customary foods like pulses, milled wheat and rice shall continue to grow. Not only is this demand relatively inelastic but another trend that is slowly emerging is the increasing consumption of certain pulses in non traditional markets such as North America and Europe.
Risks
Given that the company deals primarily with agricultural commodities, possible risks include weather conditions and supply/demand dynamics, which is turn affect pricing power and ultimately earnings. Furthermore, given the company’s penchant for mergers and acquisitions, there exists the risk of an unfavorable merger/acquisition.
The aforementioned details were an oversimplified snapshot of the details behind Alliance Grain Traders [AGT:TSX]. Due to time and space constraints, there is an immense amount of information that has not been included in this article. Please do your own due diligence and consult with a qualified financial advisor before making any investment decisions.
Summary
On a fundamental basis, Alliance Grain Traders exhibits an average return on equity of greater than 18%. Going forward, analysts project a compounded annual sales growth rate of 35% (historical sales CAGR has been 174.3%) while projected earnings per share CAGR are forecasted to come in at 3.8% (historical EPS CAGR has been 96.6%). Based on these numbers, neither is the company particularly cheap nor is it expensive. However, it is our opinion that given the favorable macro outlook for the products the company deals with, there exist opportunities for Alliance Grain Traders to sell more into their current distribution channels, increase system-wide capacity utilization from the current 50% level (approximate figures from May 18, 2010 conference call) and also carry out further accretive acquisitions. We having a standing good till cancel limit order at a price under $30 and should we get filled, we plan to hold onto this company for a very long time.
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