18 November 2016
Having increased yields for its main crops in new season Industrial Milk Company is expected to improve its financial performance. On the other side balance sheet quality of the company remains quite average with operating activity financed fully by 3rd parties funds, so it is crucial for the future stability of IMC not to be involved in overly-aggressive development.
Q3 2016 financial results
EBITDA margin, %
As usual in Q3 of any given year IMC 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 harvest, so that by type of crops sales break-downs in last reporting period looked quite similar to Q3 2015:
In Q4 the company usually sells the rest of sunflower seeds harvest (unsold in Q3), soybeans and starts corn realization (but as IMC has high self-sufficiency in storage capacities, main part of corn – historically main crop in Industrial Milk Company rotation system - is stored and sold in H1 of a year following to crops harvesting).
New season is quite favourable for the company in terms of yields: earlier IMC reported record-high soybeans yield at 3.4 t/ha and the highest for last year yield for sunflower seeds (3.1 t/ha). In addition, taking into account quite favourable conditions, good corn harvest can be expected as well (main risk factor – snowfalls in the middle of November, which can have negative influence on yields/quality of grains).
On negative side, reported price for wheat is USD 143/ton (which means main part of wheat was most likely feed wheat (price for which has been lower vs. milling wheat of higher grades)). Also we have questions to reported sunflower seeds realization price of USD 290/ton (approximately on the level of Q3 2015, though for the whole Y2015 average reported price was at USD 365/ton).
Under current market fundamentals for new season in general (July’16-June’17) we project total revenues of IMC at about USD 125-130M (with upside, which depends on the share of corn&soybeans crops sold by IMC in May-June under forward contracts with price fixed under higher vs. current market level), by 5-7% higher vs. previous season (July’15-June’16). Projected EBITDA – about USD 40-45M, so average EBITDA margin to make about 30-35% vs. 25% in previous season (disregarding non-cash “accounting” impact from biological assets revaluation, estimated EBITDA was close to USD 30M) – increase to be related with higher yields), main part is already accounted as gain from biological assets revaluation – as usual IMC uses quite aggressive assumptions for revaluation exercise (for example as of 30.09.16 book value of corn stood at USD 980/ha (vs. USD 860/ha a year ago, book value grew despite actual cost per 1 ha has been lower)).
9m 2016 results
Gain from biological assets revalutation
EBITDA margin, %
Total revenues of Industrial Milk Company in 9m 2016 made USD 80.2M, thereof USD 51M – corn of previous year harvest. Decrease of corn sales were by 27% lower y-o-y, mainly in a view of lower grains stocks in the beginning of this year vs. previous years’ (-25%), so that such revenues dynamics was fully expected. Average corn realization price in reporting period made USD 152 per 1 ton (vs. USD 155 in 9m 2015).
EBITDA for the period at USD 56.3M is almost fully composed of gain from biological assets revaluation, which is higher vs. previous season. As was earlier mentioned, EBITDA is somewhat overstated.
In any case, despite main part of profits for new season has been already shown by the company, it led to further improvement of its balance sheet quality (in addition to repayment of more than USD 30M of loans during last two years), and, therefore, margin of safety in business. Higher operating cash inflows related to new harvest (operating cash flow at USD 25-35M) will allow the company to finance planned land bank expansion by 20k ha. But basing on our opinion, as balance sheet quality of IMC is still not better than average, the company should not be involved into overly-aggressive development and keep to conservative expansion schedule.
Balance Sheet structure