If you are searching for fertile ground to plant some seed money in, Vancouver-area Raymond James Financial analyst Steve Hansen encourages you to skip the ground and go straight to the fertilizer.
Mr. Hansen first joined Raymond James in 2005, where he is responsible for covering the transportation, chemicals, and agricultural and agribusiness industries. He also previously covered the paper and forest products industry at Morningstar.
The analyst highlights phosphate-based fertilizer producer Itafos Inc. (TSX/VEN—IFOS) as a “strong buy”, his firm’s highest ranking and equivalent to a “best buy”. He explains that his optimism is based on the company achieving “another excellent quarter” in the first three months of 2022, sustained phosphate price momentum, and management guidance hikes suggesting solid debt-elimination and growth prospects.
“Coupled with several strategic initiatives designed to de-risk the platform and surface additional value (such as through the sale of non-core assets), we believe the outlook is catalyst-rich with attractive upside,” he says.
Planting seeds in the Americas
Although it is listed on the TSX Venture Exchange, Itafos is headquartered in Houston, Tex. (and incorporated in Delaware). The company’s operations is made up of several segments, including Conda, a vertically-integrated phosphate business able to produce 550,000 tonnes a year of fertilizer products operating in Idaho, and Arraias, a similar business located in Brazil with a capacity of 500,000 tonnes per year.
In addition, the company owns and operates its own phosphate mines (Santana in Brazil, with another project, Farim, in Guinea-Bissau) and a rare earth elements (REEs, used in batteries) mine, Araxa, in Brazil.
Earnings tripled year-over-year
Mr. Hansen points out that Itafos’s overall adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter almost tripled year-over-year, ballooning by 192.3 per cent to $60.3 million. Although the analyst had forecast higher, he says the actual figure shows “clearly an outstanding period that’s beginning to demonstrate the company’s underappreciated earnings power in the current cycle.”
Conda drove much of the earnings expansion. Its recent first-quarter EBITDA was 166.5 per cent higher than the same period in 2021, mainly attributable to 63.1 per cent higher realized prices year-over-year, plus slightly higher sales volume.
Mr. Hansen points out, “While cash costs increased 23 per cent year-over-year on rising feedstock prices, cash margins for MAP and MAP+ (monoammonium phosphate and MAP with micronutrients) sales again soared in tandem with benchmark pricing (by 153 per cent compared to 2021’s first quarter). Looking ahead, the facility has a short one-week turnaround set for June.”
The analyst adds, “Given the strong start to the year, management narrowed its forecast to the high end of its prior range, now calling for 2022 EBITDA of $210 million to $230 million (compared to $190 million to $230 million prior) and FCF (free cash flow) of $150 million to $165 million (compared to $135 million to $165 million prior). We continue to view this as conservative.”
Chipping away at debt
The high FCF has enabled the company has effectively chipped away at its debt. “Itafos’s historical leverage concerns continue to melt away, in our view, with the company now expected to be net-debt free by the first half of 2023. Management made strides toward this in the first quarter, paying roughly $40 million on its Oaktree facility. Importantly, we believe recent earnings and this latest pay-down position the company to refinance all of its remaining debt into a low-cost facility with greater flexibility over the next three to six months.”
The analyst calculates a new target share price of $5.75, up from $5, for the stock following the company’s impressive debut to 2022, based on an enterprise value-to-EBITDA ratio of four times (down from five times previously) on forecast 2023 operating EBITDA.
More growth to come
Finally, Mr. Hansen says, “We continue to see material upside to our forecast as management is reportedly making solid progress toward surfacing value from its non-core assets in Brazil (Arraias, Araxa and Guinea-Bissau (Farim).
“Importantly, with global crop and NPK (nitrogen, phosphate, and potassium) fundamentals increasingly skewing to ‘stronger-for-longer’ (that is, a multi-year cycle), we suspect interest in these assets continues to grow—as does their implied value.
“We expect additional news and updates on this front in the second half of this year (and) we expect further positive milestone news in the second half with regards to the company’s initiative to extend Conda’s mine life via final permitting at Husky 1 and North Dry Ridge,” Mr. Hansen adds, referring to sites in Idaho.
Steve Hansen is a Vancouver-based equity analyst for Raymond James Financial.
This is an edited version of an article that was originally published for subscribers in the June 17, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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