Astarta - We recommend buying Astarta and a fair value per share at USD 9.3.Bloomberg [AST PW]
Astarta, a dynamically growing vertically integrated agro-holding with a diversified business
structure, has aggressively expanded its land bank by 30% CAGR over last four years. This
leaves room for more expansion, which we estimate at 26% CAGR over the next five years.
Excellent corporate governance, strong financial results and expanding operating margins
are constantly enriching the value of the company’s stock. We reiterate our recommendation
to BUY with a fair price of USD 9.3.
Executive summary:
• Astarta is stepping forward to become the number one sugar producer in Ukraine.
The company processed 1.5 mln mt of sugar beet (+61% YoY) in one year and its sugar
production totaled 235 thsd mt (+51% YoY), implying a 15% share on the domestic
sugar market, which has increased almost two times compared to 8.4% in 2007.
• Financing power. Astarta’s has proved itself as the company with good reputation and
attracting of debt financing from international financial institutions is not a problem for
Astarta. Recently, Astarta’s short-term debts were refinanced with a seven-year longterm
loan from the FMO. Other banks worthy of mention are Wells Fargo HSB Trade
Bank, Raiffeisen Bank Aval, and the ABN AMRO Bank. The recent acquisition of two
sugar plants will increase Astarta’s leverage since assets may serve as collateral for
bank loans.
• Sugar prices are gaining momentum. We see several factors towards the accelerating
growth in sugar prices. Globally, India has become a net importer of sugar cane, Brazil
is increasing sugar cane consumption in biofuel production and Australia is suffering
from drastic drought in central and southern parts and flooding in the north, which will
substantial reduce Australia’s sugar cane crops in the upcoming marketing season.
Domestically, the 2008/09 marketing year is the year of sugar deficit in Ukraine. We
believe that our sugar index, which includes traded Ukrainian sugar producing
companies and particularly, Astarta, will rebound after six months of losses and
considerably outperform its growth on both the PFTS and WSE indices .
• Vertical integration. Astarta is constantly increasing its in-house sugar beet proportion
of the total beets processed and was able to achieve this at 82% in 2008 (vs. 71% in
2007). Such a strategy opens unrivalled cost efficient access to raw materials, especially
in the face of an expected sugar beet deficit in Ukraine in 2008. We expect the company
to preserve its proportion of in-house beets at 82% in 2009.
• Land – Astarta’s power drive. Astarta has expanded the arable land it leases by
30.3% CAGR to 135 ha over 2003-2007. We estimate a further 26% growth in the
company’s land bank to 170 ha in 2008. Currently, agricultural land cannot be sold or
bought in Ukraine. The possibility of agricultural reform, which would allow land to
become a tradable asset, is very high. In our view, the legalization of land as a tradable
asset will increase land values exponentially. We estimate the bottom line to be USD
500 per ha. Moreover, we believe the activity for the land bank’s accumulation will
accelerate through 2009, as weaker players that are not experiencing liquidity problems
will be forced to transmit their leased rights.
Assumptions
Astarta’s financial year ends in December. We expect strong efficiency and forward contracts
for the sale of commodities to support Astarta’s healthy margins in 2009: the gross margin at
32% and the EBITDA margin at 28.2%. We increased by 20% YoY the sugar prices.
However, future sugar production growth is limited to lower increases in sugar consumption.
Total sugar consumption increased at 0.8% CAGR over the last five years. There is a more
robust growth in the B2B sector at 9.2% CAGR, to which Astarta is exposed by selling 80%
of its sugar to big industrial clients. Moreover, we believe that world sugar prices will
determine the extent of price increases in future.
We expect Astarta’s prices to move in line with cost inflation, passing the increased costs
onto consumers. Moreover, Astarta is minimizing its costs through a vertically-integrated
structure and using in-house sugar beets for sugar production. The in-house sugar beet
totaled 81% of the overall sugar beets processed in 2008. In 2008, Astarta was able to
reduce energy consumption at its sugar plants by at least 10%, while, at the same time,
expanding its output capacities by 10-15%. We estimate that the company’s COGS will
grow at 3.5% CAGR over the 2008-2017 and that its SG&A will increase at 2% CAGR over
2008-2017.
In order to reflect the company’s efforts to expand its land bank to 250 thsd ha by the end of
2012, we calculated a total CapEx of USD 170.4 mln, which we split between assets
modernization and land acquisition. We have revised Astarta’s debt portfolio and awarded
more weight to long-term debts than to short-term ones.
Living off the fat of the land: Agriculture May, 2009
Valuation
In our valuation, we continue to consider the different valuation approaches, including the
DCF model and comparative valuation. Our DCF model suggests a fair price of USD 8.8
per share, which implies an upside of 49.2%. We also estimated Astarta’s share price faire
value using a comparative method of valuation. The company is traded at x4.2
EV/EBITDA’08 and x1.4 EV/S’08. We assign a 50% weight to the DCF valuation and a
50% weight to the comparative valuation. We recommend BUYing Astarta and a fair value
per share at USD 9.3.
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