agriculture quarterly update q3 2018 - mnp llp library/mnp/pdf/corp corp... · 2018-11-22 · page...

QUARTERLY UPDATE Q3 2018

AGRICULTURE

INDUSTRY OVERVIEWM&A TRANSACTIONS AND INDUSTRY OVERVIEW

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20

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60

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100

120

Q42014

Q12015

Q22015

Q32015

Q42015

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Q32016

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Q42017

Q12018

Q22018

Q32018

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Transaction Value Transaction Volume

Source 1: Capital IQ. Deals announced, closed or effective. Q3 cut-off of September 30, 2018. Capital IQ report run October 19, 2018. Note on Source 1: Transaction values are not disclosed for each deal, therefore total value is limited to publicly available information. In 2018 thus far, valuation details have been light despite close-to-average overall deal volume. This doesn’t necessarily indicate a decline in deal activity, but rather indicates less disclosed valuation information.Source 2: https://www.fcc-fac.ca/en/ag-knowledge/ag-economics/top-economic-trends-of-2018-farmland-values.htmlSource 3: Statistics Canada – 2016 Census of AgricultureSource 4: https://www.fcc-fac.ca/en/ag-knowledge/ag-economics/canadian-farm-equipment-market-expected-to-be-softer-in-second-half-of-2018.html

• Intense industry consolidation is still occurring. Large agricultural firms continue to enhancetheir positions in the Canadian market with acquisitions of terminal and processing facilities,and divestitures of non-core assets. There currently exists aggressive competition for deals.

• Increased investment in agricultural infrastructure in the Prairies is energizing transactionactivity. Trade wars are impacting Canadian producers and may drive transaction activity asindustry players look to diversify offerings.

• The decline in independent input providers continues due to industry consolidation. “Sellers’market” remains for independents.

• Input costs continue to rise while commodity prices have been relatively stable over the fouryear period evaluated, yet many commodities face price pressures as a result of instability inthe global marketplace2.

• Growth in farm cash receipts is expected to be moderate at 2% in 2018, slowing to 1.3% in20194. As a leading indicator to consumer spending, slowdowns in farm cash receipts in additionto significant used inventory in the marketplace may cause headwinds.

• Continued consolidation and interest of remaining independent dealerships with buyer poolshrinking may balance out valuation multiples in line with historical averages.

• Increased consolidation in Canadian farming – the number of farms decreased 6% between2011 and 2016 with 7% growth in the number of large farms over this same period3.

• Succession issues with family farms and large corporate farms have fuelled consolidationamongst primary producers, while demand for quality land has never been higher.

• MNPCF (MNP Corporate Finance) has researched extensive transactional data on farm landsales in localized areas to assist producers with assessing value expectations in the prairies. Wewould be happy to speak with interested clients regarding market insight or assisting with thesale of their company.

NORTH AMERICAN AGRICULTURE & FOOD PRODUCTSPUBLICLY AVAILABLE MERGERS & ACQUISITIONS1

Number of mergers & acquisitions in Canada in Q3 2018 in agriculture and food products19

Industry & Infrastructure

Inputs & Commodity Markets

Primary Producers

Agriculture Equipment Manufacturers& Dealerships

1 Industry & Infrastructure (Processing, Terminals, Logistics)

INDUSTRY & INFRASTRUCTURECURRENT HIGHLIGHTS

The new United State, Mexico, Canada (USMCA trade deal(commonly referred to as the ‘new NAFTA’) is expected to havewidespread impacts on Canada’s agricultural industry and inparticular, its dairy producers.

The new deal provides American farmers with tariff-free access to3.6% of Canada’s dairy market, sending hundreds of millions ofdollars more in American product into Canada1. This could putincreased financial pressure on dairy farmers, reducing the valueof production quotas.

Consolidation is expected to continue as producers look toenhance their strategic positioning in an increasingly competitivemarketplace.

USMCAThe ‘New NAFTA’

USMCA trade deal to have widespread impacts

Protein Industries Canada Supercluster

Gearing up for growth.

Protein Industries Canada announcementThe Protein Industries Canada (PIC) alliance is developing plans tomake western Canada a global leader in plant protein as aningredient in human food and livestock feed3. PIC involvesmultiple crops, including pulses, canola and hemp3.

PIC’s plans could help create 50,000 jobs in the industry and isdesigned to keep Canada at the forefront of agriculturaltechnology evolution3.

This increased support for collaboration and innovation will likelylead to further consolidation, with agricultural-focused companieslooking for additional opportunities to grow in this sector.

Unpredictable WeatherDry summers, late

season rains and snow.

2018 growing season weather impacting harvestOngoing spats between U.S. and China, together with agricultureproduction problems for Russia and Australia created an openingfor Canada to increase global crop trade market share2.

Harvest delays due to late season rain and snow have slowedharvests across the prairies and reduced Canadian producers’ability to capitalize on the current market conditions.

Increased volatility in the market created by turbulent weatherconditions could contribute to further consolidation in theagricultural space as producers aim to diversify their offerings,and seek to divest of non-core assets to strategic buyers.

Source 1: https://www.macleans.ca/economy/the-usmca-explained-winners-and-losers-whats-in-and-whats-out/Source 2: https://business.financialpost.com/commodities/agriculture/its-snowing-so-much-in-canada-that-crops-cant-get-harvestedSource 3: https://www.manitobacooperator.ca/news-opinion/news/protein-industries-canada-looks-to-plant-based-proteins-for-human-livestock-consumption/

22%

5%

5%

5%

4%

22%

0% 5% 10% 15% 20% 25% 30%

Nutrien Ltd.

Archer-Daniels-MidlandCompany

Bunge Limited

The Andersons, Inc.

AGT Food and Ingredients Inc.

The Mosaic Company

NTM EBITDA MARGIN

20%

5%

3%

5%

3%

18%

0% 5% 10% 15% 20% 25% 30%

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.


The Mosaic Company

LTM EBITDA MARGIN

45%

4%

2%

-4%

23%

21%

-10% 0% 10% 20% 30% 40% 50%

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.


The Mosaic Company

NTM REVENUE GROWTH

0%

2%

0%

-11%

-23%

15%

-30% -20% -10% 0% 10% 20%

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.


The Mosaic Company

LTM REVENUE GROWTH*

Source: Capital IQ Note *: Nutrien Ltd. LTM Revenue Growth removed for presentation as growth incorporates recent M&A with Potash Corp. and Agrium merging into Nutrien.Figures above are based on median peer group metrics.

INDUSTRY & INFRASTRUCTUREPUBLIC COMPANY PERFORMANCE

-3.5% 15.0%

8.8% 10.5%

Forecasted Improvements in Revenue Growth and EBITDA Margin for Public CompaniesThe median last 12 month (LTM) revenue growth for the highlighted companies was -3.5% (8.0% - Q2 2018) and isforecast to show strong improvements with expected normalized median next twelve month (NTM) revenue growth of15.0% (11.4% - Q2 2018) as crop processors and exporters are expected to rebound from the turbulent LTM period.

The median NTM EBITDA margin for these companies is expected to reach 10.5% (9.9% - Q2 2018), while the expectedenterprise value (EV) over EBITDA multiples are forecast to remain steady at 10.5x (10.5x – Q2 2018) over the NTM.

10.2x

9.8x

8.1x

9.7x

12.8x

7.7x

0.0x 10.0x 20.0x 30.0x

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.


The Mosaic Company

NTM EV/EBITDA

16.8x

11.1x

15.6x

10.4x

25.4x

11.2x

0.0x 10.0x 20.0x 30.0x

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.


The Mosaic Company

LTM EV/EBITDA

Source: Capital IQ

INDUSTRY & INFRASTRUCTUREPUBLIC COMPANY PERFORMANCE

15.1x 10.5x

Trading Multiples & Operating Statistics(Figures In $CAD Millions, except percentages and ratios)

CompanyMarket

CapitalizationEnterprise

Value RevenueRevenue

Growth EBITDAEBITDA Margin

Nutrien Ltd. $45,864 $59,158 $17,684 245.4% $3,512 19.9%Archer-Daniels-Midland Company $36,373 $45,198 $83,510 2.0% $4,150 5.0%Bunge Limited $12,440 $23,751 $60,262 -0.4% $1,548 2.6%The Andersons, Inc. $1,375 $2,189 $4,456 -11.3% $213 4.8%AGT Food and Ingredients Inc. $427 $1,037 $1,580 -22.8% $41 2.6%The Mosaic Company $16,184 $21,615 $10,806 14.9% $1,972 18.2%Median $14,312 $22,683 $14,245 0.8% $1,760 4.9%Mean $18,777 $25,491 $29,716 38.0% $1,906 8.8%

LTM Operating Figures

(Figures In $CAD Millions, except percentages and ratios)

CompanyRevenue

GrowthEBITDA Margin

NTM EV/EBITDA

LTM EV/EBITDA

LTM EV/REV

Nutrien Ltd. 44.8% 21.8% 10.2x 16.8x 3.3xArcher-Daniels-Midland (ADM) Company 4.2% 5.2% 9.8x 11.1x .6xBunge Limited 1.7% 4.8% 8.1x 15.6x .4xThe Andersons, Inc. -4.4% 5.2% 9.7x 10.4x .5xAGT Food and Ingredients Inc. 22.7% 4.2% 12.8x 25.4x .7xThe Mosaic Company 21.0% 21.7% 7.7x 11.2x 2.0xMedian 12.6% 5.2% 9.8x 13.4x .6xMean 15.0% 10.5% 9.7x 15.1x 1.2x

NTM Consensus Estimates Valuation

2 Inputs & Commodity Markets

INPUTS & COMMODITY MARKETSPRICE CHANGES

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Wheat - excl. durum Barley Soybeans Grain cornCanola Flaxseed Durum LentilsDry peas Farm input price index

Chart Source : Farm product prices, crops and livestock – Stats Canada.

Commodity Price Changes and Farm Input Price Index Costs While average commodity prices have seenstability in recent years, a closer look at specificcommodities indicate drastic fluctuations–notably lentils which have faced price pressureresulting from global oversupply and trade wars.The Statistics Canada Farm Input Price Index(FIPI) estimates the change in price that farmerspay for inputs into their farming operationthrough time. The FIPI indicates input costs tofarmers have increased 4.3% since the thirdquarter of 2014.

Note: Farm input price index available to Q2 2018.

CROP COMMODITY PRICES

BarleyFlaxseedCanolaDurumSoybeansDry peasLentils

+22.1%-6.7%

+10.5%+10.3%-15.8%

-1.6%-28.0%

Largest Price Changes –August 2018

Long-termΔ Since August 2014

Medium-termΔ Since August 2016

+22.3%+15.9%

+5.9%+3.4%

-11.6% -25.7%-52.3%

INPUTS & COMMODITY MARKETSMARKET PRESSURE, FUTURES & EXPORTS

Source 1: https://business.financialpost.com/commodities/why-the-u-s-china-trade-war-could-be-a-boon-for-canadian-farmersSource 2: Bloomberg – Ag Futures as of 2:55 PM EST October 19, 2018.Source 3: http://www.agr.gc.ca/eng/industry-markets-and-trade/canadian-agri-food-sector-intelligence/crops/reports-and-statistics-data-for-canadian-principal-field-crops/canada-outlook-for-principal-field-crops-2018-09-17/?id=1537281859254

Pulses Market Update1

Canadian producers have been caught in the crossfire of the ongoing trade war between the U.S. andChina. Prices of several commodities, notably soybeans and hogs, are tied to a U.S. benchmark and havefaced increasing price pressure. Market conditions have contributed to a shift in Canadian agriculturalexports. While soybean exports to Japan and the U.S. have witnessed a recent decrease, exports to Chinaand Spain have increased by 3.7% and 18.3%, respectively, suggesting current market conditions mayprovide future opportunities for Canadian producers to penetrate existing markets.

Canada’s Principal Field Crops Exports3 (kilotonnes)

Total Grains and Oilseeds Total Pulses and Special Crops

2016 – 2017 2017 – 2018(f)

42,150

Updated forecast as at September 17, 2018. Forecast in Q2 update as at June 21, 2018.

44,917(Up from forecast in Q2

update of 44,913)

Futures – Winter 2019 Contracts2

Canola (November)Wheat (September)Soybean (November)Corn (December)OatsLive Cattle (October)

485.10 CAD/MT497.00 USD/bu.834.25 USD/bu.354.75 USD/bu.241.75 USD/bu.107.38 USD/lb.

Futures – Fall 2018 Contracts*Canola (January)Wheat (December)Soybean (November)Corn (December)Oats (December)Live Cattle (December)

502.50 CAD/MT514.75 USD/bu.856.75 USD/bu.367.00 USD/bu.295.25 USD/bu. 116.78 USD/lb.

FUTU

RES

CON

TRAC

TS

Note *: As included in MNPCF Quarterly Update –Agriculture – Q2 2018. These quotes on Futures havebeen included for comparison purposes only.Note: Cattle costs are USD per hundredweight.

2018 – 2019(f)

45,4532016 – 2017 2017 – 2018(f)

7,137 5,369(Up from forecast in Q2

update of 4,975)

2018 – 2019(f)

5,430

3 Primary Producers

PRIMARY PRODUCERSLAND VALUE TRENDS

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3,500

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25%

1980 1985 1990 1995 2000 2005 2010 2015

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Prim

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FARM VALUES VS. FARM CASH RECEIPTS & INTEREST RATES

Average prime interest rate Value per acre of farm land and buildings (Canada)

Source 1: https://www.ratehub.ca/prime-mortgage-rate-historySource 2: Stats Canada: Table 002-0003: Value per acre of farm land and buildings, at July 1.Source 3: https://business.financialpost.com/news/economy/bank-of-canada-raises-interest-rate-to-1-75Source 4: https://www.fcc-fac.ca/en/ag-knowledge/ag-economics/top-economic-trends-of-2018-farmland-values.htmlSource 5: https://www.fcc-fac.ca/fcc/about-fcc/reports/2017-farmland-values-report-e.pdf

Key external drivers affecting agricultural industry performance in Canada include: commodity prices, interest rates,consumer preferences, growing season conditions and results, and farm land values.

The chart above highlights growth in farm land and building values. Values have increased significantly along with farmcash receipts over the last 15 years while interest rates have displayed a downward trend.

MNPCF has researched extensive transactional data on farm land sales in localized areas to assist producers withassessing value expectations in the prairies. We would be happy to speak with interested clients regarding market insightor assisting with the sale of their company.

On October 24, 2018 the Bank of Canada hiked its key interest rate another 0.25%, the fifth such rate since July 2017. Thishas widespread impact with the farming sector feeling particularly strong effects due to high levels of debt financing.Increases in interest rates result in larger interest payments on outstanding debt, which may impact farmland valuations.Continued industry consolidation may counteract any decreases in valuation resulting from increasing interest rates. Farmcash receipts remain the most important predictor of land values.

The 2017 FCC Farmland Values Report published April 23, 2018 indicates strong growth in value for 2017, with an 8.4%increase for farm land in Canada, with boosts of 10.2% in Saskatchewan, 7.3% in Alberta, and 5.0% in Manitoba5.

Since 2000, interest rates have

decreased 4%, while farm values per acre

increased 240%*. *Using Bank of Canada prime interest rate and information in graph above.

Farm Values Continue to Rise

1 2

Farm Cash Receipts (Canada)

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25%

1980 1985 1990 1995 2000 2005 2010 2015

Value ($/acre)Prime Interest Rate (%)

INTEREST RATES AND FARM VALUES

Average prime interest rate Value per acre of farm land and buildings (Canada)

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40

50

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70

Farm

Cas

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ceip

tsBi

llion

s

4 Agriculture Equipment Manufacturers & Dealerships

14

16

18

20

1,000

3,000

5,000

7,000

9,000

Q32013

Q12014

Q32014

Q12015

Q32015

Q12016

Q32016

Q12017

Q32017

Q12018

RESULTS BY QUARTER

AGRICULTURAL EQUIPMENT MANUFACTURERS & DEALERSHIPS

Farm cash receipts have levelled in recent years with Q1 2018 receipts falling below both Q1 2016 and Q1 2017totals. Farm cash receipts display a defined pattern of drastic annual fluctuations as cash receipts are a laggingindicator of ag equipment sales. Q2 2018 results in ag implement sales appear to suggest a turnaround as all fourcompanies below outperformed their two previous years’ Q2 sales totals.

Farm Cash Receipts and Agricultural Implement Sales

Source 1: Capital IQNote: John Deere has a fiscal year-end of October. John Deere quarterly results based on calendar months were used for presentation purposes to align results with other companies.

Data Table –Farm Cash Receipts and Agriculture Implement Sales

0

2

4

6

8

10

12

-

100

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300

400

Q32013

Q12014

Q32014

Q12015

Q32015

Q12016

Q32016

Q12017

Q32017

Q12018

Q3f2018

Farm

Cas

h Re

ceip

ts

($ b

illio

ns)

Reve

nue

($ m

illio

ns)

Rocky Mountain Equipment (RME) Cervus Equipment - Agricultural Equipment (CE)

John Deere - Ag and Turf (DE) CNH Industrial (New Holland and Case IH) - Ag Equipment (CNHI)

Farm Cash Receipts (AB, SK, MB)

Farm Cash Receipts and Ag Implement Sales 2013 2013 2014 2014 2014 2014 2015 2015(Figures in $CAD Millions) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Rocky Mountain Equipment (RME) 273 291 198 242 231 294 220 213 Cervus Equipment - Agricultural Equipment (CE) 177 151 103 164 201 164 140 185 John Deere - Ag and Turf (DE) 7,425 6,252 8,410 7,608 6,986 5,196 6,997 6,933 CNH Industrial (New Holland and Case IH) - Ag Equipment (CNHI) 4,257 4,400 4,089 4,731 4,091 3,941 3,263 3,787 Farm Cash Receipts (FCR) 6,984 6,989 8,776 7,218 7,594 8,459 9,609 7,176

2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3f

256 286 189 233 223 286 210 237 239 273 220 303 259 233 154 131 188 240 179 146 235 271 182 159 277 N/A

6,100 5,077 7,215 6,141 5,950 4,726 7,937 6,657 7,009 5,240 9,084 8,236 N/A3,257 4,138 2,754 3,645 3,096 3,800 3,126 3,760 3,314 4,063 3,326 4,356 N/A8,242 8,866 10,440 6,832 7,655 8,744 10,515 7,738 8,124 8,296 9,742 N/A N/A

-80

-30

20

70

120

170

Oct-2013 Apr-2014 Oct-2014 Apr-2015 Oct-2015 Apr-2016 Oct-2016 Apr-2017 Oct-2017 Apr-2018 Oct-2018

Chan

ge (%

)

SHARE PRICE & S&P/TSX INDEX CHANGES1

S&P/TSX Composite Index (^GSPTSE) - Index Value

Rocky Mountain Dealerships Inc. (TSX:RME) - Share Pricing

Cervus Equipment Corporation (TSX:CERV) - Share Pricing

CNH Industrial N.V. (NYSE:CNHI) - Share Pricing

Deere & Company (NYSE:DE) - Share Pricing

AGRICULTURAL EQUIPMENT MANUFACTURERS & DEALERSHIPS

Source 1: Capital IQSource 2: https://www.fcc-fac.ca/en/ag-knowledge/ag-economics/canadian-farm-equipment-market-expected-to-be-softer-in-second-half-of-2018.html

Share Price ChangesShare price fluctuations have been increasingly volatile since 2016 with John Deere experiencing the largest fluctuationsin share price increasing over 128% since Q3 2013.

“Rising interest rates, price pressures on farm equipment, slowgrowth in farm revenue along with a weaker Canadian dollar isexpected to lead to softer farm equipment sales in the second half of2018… Sales are expected to slow due to trade uncertainties aroundcommodity prices and from lower expectations for crop yields due tothe dry growing conditions in Canada2.”

Farm Credit

Canada(FCC)

Notable & Quotable

About Us – MNP Corporate Finance Inc.

MNPCF – LEADERSHIP TEAM

DUE DILIGENCE LEADERSHIP

TRANSACTION LEADERSHIP

Aleem BandaliManaging Director

[email protected]

Dale AntonsenManaging Director

[email protected]

Wilma BraatManaging Director

[email protected]

John CaggianielloManaging Director

[email protected] 416.513.4177

Brett FranklinPresident

[email protected]

Mike ReynoldsManaging Director

[email protected]

Johnny EarlManaging Director

[email protected] 604.637.1514

Dan PorterManaging Director

[email protected]

Stephen ShawManaging Director

[email protected]

Jason BurgessManaging Director

[email protected]

Mark RegehrManaging Director

[email protected]

Craig MaloneyManaging Director

[email protected]

Patrick KhouzamManaging Director

[email protected]

MNPCF – RECENT TRANSACTIONS

AGRICULTURE

NATIONAL

OTHER RECENT INDUSTRY M&A TRANSACTIONS

Source: Capital IQAll figures are in $CAD unless otherwise indicated.

• Rocky Mountain Dealerships Inc. (TSX:RME) enteredinto a definitive agreement to acquire John Bob FarmEquipment for $13.4 million.

• Rocky Mountain Dealerships Inc., through itssubsidiaries, sells, leases, and provides support servicesfor new and used agriculture and industrial equipmentprimarily in Canada and the United States.

• John Bob Farm Equipment operates as a dealer of newand used farm equipment in Tisdale and Outlook, SK.

Announced July 3, 2018

Industry Ag Implement Dealerships

Transaction Value (TV) 13.4 million

TV/Revenue Not disclosed

• Clean Seed Capital Group Ltd. (TSXV:CSX) entered intoan agreement to acquire Harvest International.

• Clean Seed Capital Group Ltd., together with itssubsidiaries, develops, produces, and distributestechnology-based agriculture equipment in Canada.

• Harvest International, Inc. manufactures agriculturalplanting equipment. The company was founded in 2007and is headquartered in Storm Lake, Iowa.

Announced July 17, 2018

IndustryAgricultural and Farm Machinery

Transaction Value (TV) 25.07 million


acquired

acquired

• MNP Corporate Finance acted as exclusive financialadvisor to CanMar Grain Products Ltd. in structuring andnegotiating this transaction with Hokanson Capital Inc.

• Hokanson is a family owned private investmentcompany with current investments that include a largeagriculture portfolio.

• CanMar is a vertically integrated, value-added, flaxseedagri-food business located in Regina, Saskatchewan.

Closed Nov 30, 2017

Industry Processing, distribution

Transaction Value (TV) Not disclosed


acquired

• MNP Corporate Finance Inc. acted as exclusive financialadvisor to Fiskel Farms Transport Ltd. in structuring andnegotiating this share transaction.

• Wright Spud Farms Inc. is a large potato and grainfarming company based in the Carberry area and hasbeen named as one of McCain Foods' Top 10 Producers.

• Fiskel Farms is a 3,300-acre potato and grain farm witha McCain Foods grower’s contract located nearCarberry, Manitoba.

Closed April 15, 2018

Industry Farming

Transaction Value (TV) Not disclosed


Wright Spud Farms

Acquired

Fiskel Farms

agriculture quarterly update q3 2018 - mnp llp library/mnp/pdf/corp corp... · 2018-11-22 · page...

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