Direct agro investments: Tonkens Agrar

Recently there were reports in the media again (here or here) about investments in agricultural products. The timing is quite strange, since prices declined recently quite a lot (????), however I started to look into such investments since some time.

Such articles usually are about investments into commodities via (leveraged) certificates, options or futures. Since I only have very basic knowledge about such derivates and in my opinion its pure gambling with a potential total loss.

However there is also the other option, investing directly into an agro company via equity, becoming a shareholder. Here I want to focus on “straight/pure” agro companies, and not such as fertilizer producers, etc. As a guess those companies should probably have higher margins however.

In Germany there are as of my knowledge two publically listed companies, being directly involved in producing and harvesting crops as their primary business.
Those companies are KTG LINK and TA LINK.

Here; in this post I want to focus on Tonkens Agrar (TA), since KTG is a main player in this field and it already receives a lot of coverage. A comparison of the two companies would be favorable and might follow at a later point.

Tonkens is listed since their IPO in 2010, placing 1.432 mio. Shares for 23,75 apiece, quickly follow by a secondary offering, being less successful (issued only 0,227M of 0,358M shares allowed, 18,9 EUR each). TA has fields of 2.900 ha in East-Germany, leased to a great extend (73%), some worked on as a service provider (20%) and only 7% owned. Cultivated are onions, potatoes, wheat, corn, oil fruits and plants for animal food. They only use conventional ways of production, no organic food or such.

For this analysis I have data from 2009-2011, no quarterly/half year reports are being given, only a short statement for the half year. Business year ends on the 30th of June each year. The renewables segment only exists since 2011.

As can be seen, revenues and corresponding EBIT is far from proportional (f.e. storage 2011) and EBIT is much more volatile than revenue. In the AR I have not been able to find any information about this revenue peak in storage 2011, what I find a bit strange. Might be an indication for unused capacities in the previous years, which now were being offered on break-even price. It will be interesting to see whether this was a one-time item.

ROA	-4,9%	5,3%	-2,0%
ROE	-12,4%	22,7%	-9,4%
EBIT Margin	-5,8%	22,4%	1,1%
Profit Margin	-7,8%	11,2%	-3,4%

Earnings are very volatile as well, 2011: (1.711), 2010: 1.462, 2009: (468). Since they are often negative and TA is accounting after IFRS, IAS 41 (biological assets) is a full fair value standard, we often have ([at least short-term] non-cash) fair value changes distorting the earnings. A look at cash-flows might help us in getting a clearer image:

CF from op	2.439	-             596	208
CF from inv	-         5.249	-         1.969	-           2.030
FCF	-         2.810	-         2.565	-           1.822

CF from operation itself is often positive, what is a good signal. Investment is clearly a big point here; however cash has been raised exactly for this purpose, so that’s alright.

CapEx	6.107	2.426	3.518
Net CapEx	4.874	1.456	2.679
CapEmp	20.942	14.116	11.911
ROCE by EBIT	-6,0%	20,7%	1,3%

I tried to compile investments made in 2011, what I guess has been bought are mostly additions, some of the expenses are probably falling into 2010: 1MWp PV plant; 0,5 MWp biogas plant starting operation in Dec 2011 for 2-2,5 Mio EUR; Storage system; potato peeling machine. About the biogas plant management has been writing since 2009, and it took them around two years for one plant, that is quite slow, also not a single explanation has been given. In general stake-/shareholder-communication is very bad, despite opposite announcements made. This business year there was one statement regarding the half year AND …….

TA is trying to get away from pure agriculture more into processing food and creating energy, since those are higher margin operations and might reduce volatility.

In my opinion an investment in TA is a very risky one; success heavily depends on their investment strategy, the annual report for the current year should provide more information about cash-flows and if their operational business is at least self-carrying. At the end of business year 2011 (June 2011), there still was 5,2M cash left, so still quite some money to invest.

Using classic valuation multiples here is difficult, since in 2011 even EBITDA was negative.

price 28.05.2012	9,55
P/B	1,14
beak even P/B	8,35
P/E	0,0
MaCap	15.843
Enterprise Value	17.735

Working-capital management is astonishingly quite good, although featuring a declining trend.

DPO	119,2	160,1	137,6
DRO	53,8	81,8	67,2
DPO-DRO	65,5	78,3	70,4

If anybody should feel inclined to invest, I would advise to wait a bit longer, since the holing period for pre-IPO shareholders should run out in the coming months.

All in all we could see how difficult it is to earn money with basic planting and harvesting of crops, despite EU/German subsidies. The shift towards energy production and food processing clearly shows this. If the move towards higher margin business will succeed, TA might become a less volatile, more profit company, however right now an investment is quite risky in my opinion.