Industrial Milk Company
Emitents -> Industrial Milk Company (WSE:IMC)

Business description

Industrial Milk Company is one of the largest Ukrainian agro-holding with total land bank of 137k ha, situated in Poltava, Chernigiv and Sumy regions of Ukraine (by its land bank the company belongs to TOP-10 Ukrainian agri-producers). The company is also noticeable (9th place among industrial producers) raw milk producer with total number of cattle heads at 5 994 (including 3 386 cows), at that dairy business direction still accounts for about 5% of total annual revenues only, while main part is provided by crops growing business.

After an IPO in May’11 and till Y2014 focus of the company has been on aggressive expansion (land bank increased from 40k ha in Y2010 up to current 137k ha, storage capacities grew from 172k tons up to 550k tons). Such extensive growth along with significant increase of financial leverage negatively influenced financial situation of the company after decrease of agricultural commodities prices starting from 2H 2013, so that margin of safety in activity of IMC lowered to dangerous levels. Starting from Y2014 the company focused on optimization of its business and decrease of debt burden, having significantly lowered its investments, which proves itself as right strategy at the moment.

Main produced crops by the company are corn, sunflower, wheat, soybeans. During last years IMC was mainly focused on corn, which took more than 50% of total harvested area of the company.

At the moment the company owns silos with total storage capacity of around 570k tons (vs. total harvest in Y2015 of about 700k tons of grains), so self-sufficiency in storage capacities is high, which provides IMC with flexibility to sell its crop at the time of its preference and reduce sales at harvest, when prices can be low because of supply pressure. The company also owns than 750 units of agricultural machinery.

Main operational risks of the company are lack of diversification (both from geographical and cultivated crops perspective – IMK is focused on late crops, which means dependence on weather conditions in the target regions in July-August) and vertical integration – IMC is pure farming company, so is fully dependent on grains&oilseeds market conditions.

Since May’11 Industrial Milk Company has been listed on WSE under the ticker symbol IMC. Current free float is – 26.3%.

Sown area distribution and yields for main crops are represented in table below:

Season 2016/2017 est 2015/2016 2014/2015 2013/2014 2012/2013
Sown area, ha 71 17475 18583 38761 40038 664
Yield per 1 ha, tons
Sunflower seeds
Sown area, ha 25 09524 60619 13825 50017 410
Yield per 1 ha, tons
Sown area, ha 15 40712 3038 20210 5007 927
Yield per 1 ha, tons
Sown area, ha 6 4166 8358 2024 4005 282
Yield per 1 ha, tons
Total land bank, ha 136 700136 700136 700120 70082 640

Financial information

USD k 9m 2016 9m 2015 .. 2015 2014 2013
Sales 80 254 100 233 140 388 138 267 114 767
Gross Profit 56 294 67 601 74 345 61 927 54 005
EBITDA 56 266 56 949 66 522 57 398 49 477
EBITDA margin, % 70% 57% 47% 42% 43%
Net Profit 16 690 20 140 14 041 -47 328 25 815
30.09.16 .. 31.12.15 31.12.14 31.12.13
Total Assets 203 683 - 174 627 183 796 361 869
Fixed Assets 76 071 - 90 752 80 989 174 473
Current Assets 127 612 - 83 875 102 807 187 396
Inventory 100 070 - 69 130 92 890 156 756
Cash 8 659 - 6 673 3 004 16 431
Equity 69 690 - 60 023 27 274 153 992
Debt 100 533 - 98 742 127 449 139 987
9m 2016 9m 2015 .. 2015 2014 2013
Net Operating CF 19 716 17 314 34 410 25 212 4 189
Financing CF -13 688 -15 118 -23 404 11 869 30 283
Dividends paid 0 0 0 0 0
Net Borrowings -13 688 -15 118 -23 404 11 869 30 283
Investing CF -2 545 -2 477 -2 966 -25 800 -19 801

Latest financial report of the company

Comments to latest financials:

  • Following significant expansion after IPO in Y2011, driven by good market conditions and high prices of agricultural commodities (investments into land bank and storage facilities expansion have been much more aggressive vs. stated in IPO prospectus and were largely financed by new debt attraction), after decrease of grains prices in 2H2013 and unfavorable geopolitical and economic situation in Ukraine since Y2014, Industrial Milk Company almost frozen its development. During last two years land bank of the company has been stable at close to 136.7k ha.
  • As for last reporting period operations, in 1H2016 IMC realized corn of previous year harvest, stored at own silos. As corn stock as of beginning of current year was by 20% lower than a year ago (main reason - last season’s corn harvest was lower than in Y2014 by about 14% due to slightly lower sown area and yield), total revenues of IMC in 1H 2016 declined by 26% y-o-y down to USD 54.4M.
  • Average realization price for corn in 1H 2016 made USD 151/ton (the company usually sells corn on CPT terms in ports), vs. USD 155/ton in 1H 2015 (in line with general market trend).
  • Speaking about marketing year of IMC operations, total sales volume during July’15-June’16 made USD 121M vs. USD 130M a year ago, mainly in a view of average realization prices decline.
  • In Q3 of any given year Industrial Milk Company starts realization of its new season harvest. Usual pattern for the company - main part of wheat and significant part of sunflower seeds are realized almost right after harvesting. In Q3 2016 sales of the company made 25.8M, thereof wheat – USD 6.7M, sunflower seeds – USD 14.2M.
  • During last period of time CPT corn price in Ukraine has been in USD 150-155 per 1 ton range, but in May-June forward price for new crop reached USD 170 per 1 ton, so that like other companies Industrial Milk Company had an opportunity to sell some part of its future corn crop on rather good price terms.
  • New season has been quite favorable for the company in terms of yields: IMC reported record-high soybeans yield at 3.4 t/ha and the highest for last several years yield of sunflower seeds (3.1 t/ha). Corn harvest can be estimated at the good level as well.
  • Industrial Milk Company demonstrated quite stable formal operating profitability during last years of operations (FYs2012-15) with EBITDA margin in 42-47% range. We estimate that formal profitability of IMC in FYs2014-15 was positively influenced by effect of UAH devaluation (costs were incurred under lower USD/UAH rate vs. rate when crops were realized). Basing on our analysis we estimate that factual (disregarding accounting effect of devaluation) EBITDA margin of IMC in last season has been at approximately 25%.
  • Under current market fundamentals for new season (July’16-June’17) in general, we project total revenues of IMC at about USD 125-130M, by 5-7% higher vs. previous season (July’15-June’16). Projected EBITDA – about USD 40-45M, so average EBITDA margin is to make about 30-35%.
  • IMC remains rather aggressive in revaluation of its crops, EBITDA for the period at USD 56.3M was almost fully composed of gain from biological assets revaluation, which has been higher vs. previous season (USD 54.7M vs. USD 33.7M a year ago).
  • As of 30/09/16 book value of corn per 1 ha made USD 980 vs. USD 900 a year ago (current season assumptions: yield of 7.5t/ha, price – USD 139/t).
  • Balance sheet structure of IMC is generally adequate as for agricultural producer, though during FYs2011-13, because of expansion financed largely with new debt attraction, BS quality worsened. UAH devaluation in FY2014 led to further deterioration, as a result as of 31.12.14 Equity stood at USD 27.3M, Debt – USD 127.5M. On positive side is the fact that starting from Y2014 the company stopped its expansion (partially of course just because of lack of funding) and minimized new investments, focusing on business optimization and balance sheet repairing. In frames of this policy the company repaid more than USD 20M of its debt in last marketing year (using cash flow from operations as the source). As a result, during last two seasons financial structure of IMC improved.
  • As of 30.09.16 Equity of Industrial Milk Company stood at USD 70M (though it already reflected main part of new season’s profits – accounted in form of gains from biological assets revaluations), Debt – USD 100.5M, main financial ratios looked as follows: Net Debt/EBITDA – 1.4x (disregarding influence of UAH devaluation, adjusted Net Debt/EBITDA for current season is estimated at 2.3x), Debt/Equity -1.4x.
  • As for plans for the nearest future, we expect that provided bank loans renewals/refinancing operating cash inflows related to new harvest (estimated in the range of USD 25-35M) will allow the company to finance planned land bank expansion by 20k ha.

As a summary current financial standing of the company is average, on negative side is still large debt burden, so that margin of safety in activity is not high; on positive – established operations, good asset base, focus on optimization and decrease of debt burden during last reporting periods.

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