Ag Growth bucks weakness in ag equipment sector

Ag Growth International bucked the weakness in the farm machinery sector, unveiling a jump in earnings and foreseeing profits remaining strong, thanks to the prospect of large harvests.

The Canada-based maker of grain handling and storage equipment reported a more than doubling in earnings, to Can$13.64m, for the April-to-June quarter, on revenues up 19.7% at Can$112.4m.

"Favourable crop conditions in North America and continued investment in agricultural infrastructure lead to robust demand for on-farm and commercial grain handling, storage and aeration equipment," Ag Growth International said.

With demand in many overseas markets boosted by desire to fill "a significant storage and handling infrastructure deficit", revenues hit record levels "in all geographies" for the first half over 2014 overall.

'Excellent market environment'

 Orders remain strong too, ahead of what are expected to be record corn and soybean harvests in the US, and with bumper crops in many other countries too.

"With what is forecast to be another huge crop looming the market environment for our on-farm equipment is simply excellent," said Gary Anderson, the group's chief executive.

Although Canada is expected to see smaller crop volumes this year than in 2013, when yields were unusually high, demand in Ag Growth's domestic market is being spurred by the  after-effects of the deregulation of Canadian grain marketing, and the removal of Canadian Wheat Board monopolies.

The reform "has spurred incremental investment as commercial grain handlers seek efficiencies and expand their footprint to compete for supply".

Ukraine boom

The group also flagged continued strong business in crisis-hit Ukraine, a key foreign market, to where Ag Growth expects to ship $50m in product over the "next several quarters".

"Management expects to transact significant business in Eastern Europe, particularly Ukraine" this year, the company said.

"Our customers in Ukraine are predominantly well-capitalised entities that either qualify for Export Development Canada insurance, direct financing or are able to pay cash in advance of shipment".

With the Ukraine customers generally transacting "a significant portion of their business" in US dollars, they are "largely insulated from volatility in local currencies.

"We remain in regular contact with our customers in the region and to date there has not been an indication that their capital expenditure plans have been substantially impacted by the recent events."

'Downturn in agriculture'

The comments contrast with those from many other farm machinery groups - in particular those making field equipment rather than the storage needed for a large harvest - which have reported a dent to takings as low crop prices reduce growers' willingness to spend.

Overnight, AgJunction, a maker of farm satellite equipment, reporting a fall $585,000 into the red for the April-to-June quarter, compared with earnings of $1.13m a year before, said it was "impacted by the downturn in agriculture which has led to reduced equipment sales".

Revenues dropped 37% to $10.3m.

The results came hours after machinery giant Deere & Co reported a fall in earnings and cut its guidance for its financial year, warning that "falling commodity prices are contributing to a reduction in farm income".

'Giant opportunity'

Ag Growth's earnings equated to Can$0.98 per share, ahead of the Can$0.90 that investors had expected.

Cantor Fitzgerald raised by Can$2 to Can$53 its target price for Ag Growth shares, on which it kept a "buy" rating.

"Notably, we do not factor in potential upside from the consummation of any acquisitions which has been a key success factor in driving shareholder returns," Cantor analyst Peter Prattas added.

"One area where Ag Growth may look to acquire next is in Brazil where it sees a giant opportunity for the sale of its products."

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