Tags
accretion, activist investors, Avangardco, Cal-Maine Foods, corporate governance, eggs, enhanced EPS/NAV, free cash flow, intrinsic value, Iryna Marchenko, lowest cost producer, M&A, majority control, minorities, Nataliya Vasylyuk, Oleg Bakhmatyuk, P/E ratio, P/S Ratio, Return on Equity, risk aversion, share buyback, technical analysis, Ukraine, Ukrlandfarming
Here’s a copy of a recent letter to the CEO & CFO of Avangardco.
Note I’ve updated all figures, as appropriate, to reflect today’s $10.50 closing price – otherwise, the text remains unchanged. For reference, I’ll also include Word copies of the original below. The letter speaks for itself, and is also a great reminder to readers of AVGR‘s extraordinarily cheap valuation! So, without further ado:
‘November 05, 2012
FAO:
Nataliya Vasylyuk, CEO, &
Iryna Marchenko, CFO
Avangardco IPL
121 V Prospect Peremohy
Kyiv, 03115
Ukraine
Dear Nataliya & Iryna,
First, I believe (from your website) you are already familiar with the Wexboy blog. Second, my congratulations on your recent results! To report a 27% yoy increase in revenues, +36% on operating profit (to reach a 43% margin), and +47% on EPS is most impressive. I didn’t post a write-up, as I had flagged up excellent results to come, but I hope you’ll find my recent AVGR post interesting.
I remain an enthusiastic shareholder, with a 2.6% portfolio stake. To see the market rewarding your recent performance with a $10.50 share price, a 1.1 price/sales ratio, and only a 3.0 P/E ratio seems ridiculous. My personal estimate of AVGR’s intrinsic value is at $31.83 per share, which offers a 203% upside potential! That equates to a 3.3 P/S ratio & a 9.1 P/E ratio – quite conservative in light of recent margins & earnings growth. Ideally, I’d increase my stake, but I’ve limited my risk for the moment due to current stock volatility & sentiment. I’m writing to you now with a number of recommendations. These are unrelated to your business performance – your operational execution has been flawless:
i) Avangardco is now the #1 & #2 egg producer in Eurasia & the world, and aims to become the #1 global producer, which should offer further economies of scale. For investors, though, focusing on the largest companies is no guarantee of investment success. However, identifying & investing in the lowest cost producers is often a far more reliable & rewarding strategy. This is a specific focus for many well respected hedge fund investors.
I believe a greater emphasis on your low cost structure & advantage(s) will attract increased investor interest. Personally, I’ve assumed AVGR is already (one of) the lowest cost global producers (and noted your significant cost advantage vs. Cal-Maine Foods). However, most of your competitors are unlisted, so a more comprehensive analysis is beyond my scope.
Will you consider researching your global production cost ranking & emphasizing this cost advantage in your future Investor Relations materials?
ii) There is continued uncertainty re a potential merger with Ukrlandfarming plc (wholly-owned by your Chairman, Oleg Bakhmatyuk, who also owns a majority stake in Avangardco). This speculation has been rife in the media for a significant period now, you have acknowledged it as a potential corporate strategy, but essentially no further details have been provided. This information vacuum has clearly penalized AVGR’s valuation & has presumably deterred new shareholders from investing.
I believe a more fairly valued AVGR market cap., and equitable & transparent treatment for all shareholders in the event of a merger (or other transaction), is vital to the long term success & investor support for a potentially enlarged group. I understand market & corporate circumstances can change rapidly, but it should be possible to provide more detail on potential merger/related strategy alternatives. For example, this could include a possible timeline, how AVGR shareholders might be rewarded and/or participate in a transaction/merger, and/or some idea of the benefits & scale resulting from (say) a merger.
Will you provide enhanced commentary & info. on these potential strategy alternatives, or commit to providing a more comprehensive investor presentation by a certain date?
iii) I believe there are certain other factors negatively affecting AVGR’s share price, including:
a) Oleg Bakhmatyuk’s 77.5% majority stake: A dominant shareholder is always a concern for minority investors, but there has been no actual justification for such anxiety, and your IR strategy & disclosure has been exemplary. This is about sentiment – investors display little concern, for example, over poor corporate governance (like dual-class share structures) in many US tech & (social) media companies. The only concern that can be realistically addressed here is highlighted in ii) above.
b) The political, economic & governance risks of investing in a Ukrainian company: Obviously, these risks concern you from an operational perspective. But worrying about their impact on the share price seems rather pointless – continued execution of your growth strategy is the only sensible solution.
c) Share price technicals & investor aversion to risk: The ultra-cheap AVGR share price & valuation seems to bizarrely encourage some investors to panic-sell! Which prompts other investors to sell – a negative feedback loop! It may also discourage new investors. Absurd, of course – AVGR’s cheap price, margins & accelerated earnings growth more than compensate for any (perceived) risk. There is little that can be done about this – continued execution of your growth strategy is, again, the solution.
Overall, as long you continue to execute, poor sentiment & a low share price will prove to be a temporary phenomenon. In fact, it’s something to embrace & exploit! A share buyback is a marvelous way to offer reluctant shareholders an exit, and to enhance intrinsic value for remaining shareholders. The current $10.50 share price offers a v cheap opportunity to implement the 5 million GDR share buyback that was already approved in Dec-11.
In the past year, AVGR’s generated $327 mio from operations, while free cash flow (after net interest, taxes & capex) amounted to $138 mio. This is excellent news, and Avangardco now holds gross cash of $333 mio & net cash of $4 mio. A 5 mio share buyback at (say) an average 10% premium will only cost $58 mio. AVGR’s current cash position (& future cash generation) offers generous funding & capacity for a buyback, and your current growth & capex plans. A buyback would ideally absorb any ongoing investor share sales & push the share price higher, reverse the current poor technicals & sentiment, and send a v positive corporate governance signal to current & prospective investors.
Most importantly, buybacks at a significant discount (to any reasonable estimate of intrinsic value) are a v effective way to enhance shareholder value. I’m sure this is an ongoing discussion with your advisors, but perhaps I can illustrate the potential impact of a full buyback in 3 different ways:
a) Investment Perspective: Investment in your business offers high growth/return, but an investment in AVGR shares is even more attractive. Based on current earnings & a 3.0 P/E ratio, any buyback is basically an investment that offers a net 30.2% return on equity.
b) Earnings Perspective: Of course, bought back shares will be cancelled. But loss of interest income on the utilized cash is negligible, so net income remains virtually unchanged. With the outstanding share count reduced by 7.8%, the buyback provides an 8.3% increase in EPS.
c) Valuation Perspective: As a high growth company, I expect most investors (like myself) value AVGR based on appropriate P/E and/or P/S ratios. Post-buyback, cash is reduced, but revenues & earnings remain virtually unchanged. Factor in the reduced share count and you arrive at a higher intrinsic value per share. I calculate my estimate would increase by 8.4% to $34.50 per share.
Will you consider launching a full 5 mio GDR buyback program as soon as possible?
I’m available at wexboymail@yahoo.com, or by conference call, if you wish to discuss further. I’d like to thank you in advance for your consideration of these recommendations. I’d appreciate your immediate reply just to acknowledge receipt of this letter, and to confirm when you expect to be able to respond properly. Please note I intend to publish this letter on the Wexboy blog in due course.
Kind regards,
Wexboy
Avangardco Letter (28 Oct 2012) (docx file)
Avangardco Letter (28 Oct 2012) (doc file)
dossingtimes said:
How do you find the company now. Price dropping a bit
Wexboy said:
Yes, don’t recall the price level it broke, but in last month I remember thinking – oh, this thing looks like it will go sub-$10 again & possibly return to the $8s. And here we are…
I obviously hope we don’t see the $8 level break – that could lead to a sell-off to the $6s. Despite thinking the share price might fall, I didn’t sell – considering my small stake, and AVGR’s cheap fundamentals & great prospects, a ‘trading’ sale didn’t make much sense to me.
We’ve essentially returned to early-2012 with the share price, but fundamentally the company’s as cheap as ever, and of course prospects appear better than ever. Their huge capex project appears to remain on schedule & will be basically completed in 2013 – this is v fortunately complemented by the new EU export approval (final details of which need to be ironed out), so AVGR’s new capacity can hopefully ramp up & be absorbed v quickly into EU, in due course. We also need to see fresh comments/progress re a potential business combination with Ukrlandfarming.
All in all, the price, fundamentals & prospects are really no different than when I first mentioned/invested in AVGR – but yes, this stock really demands great patience..!
Stefan said:
I think investors are scared of the recent bird flu outbreak in China. I think it could destroy this company. Anyhow, I initiated a new position @7.5USD. Let’s hope for the best.
http://www.zerohedge.com/news/2013-04-05/china-begins-mass-slaughter-poultry-bird-flu-kills-six-verge-becoming-epidemic-realt
Wexboy said:
That’s what insurance is for… Bird flu, Cyprus, Ukraine, Oleg, etc.etc. – lot of people hate & possibly misunderstand this company – not an easy one to hold…
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Martin said:
Hi Wexboy,
did you come across the other 21 public IPOs of Ukrainian agribusinesses since 2005? They are listed in London, Warsaw or Deutsche Börse. I am already invested in avangardco. As this is just a hobby of mine, I can’t analyze every company, but I think there is much value to be picked up. Would be thankful if you could point me to some companies you think are worth to analyze.
My screener pointed me to Warsaw-listed KSG Agro so far. They have a buy-back in place. The price has fallen since IPO in 2011, but operative development was good. I want to buy three 1.5% positions, which means I don’t have to analyze that deeply, but just buy cheap and wait some years.
Wexboy said:
Hi Martin,
Yes, to date I’ve preferred to focus on the London, German, French & Scandi listings of Russian/Ukrainian agri-business stocks. I know the Polish listings, but haven’t looked at them more closely.
Generally, the majority of farmland-owners continue to consume cash, and are in need of more funding – this will throw up opportunities in due course, but meanwhile non-land owning producers & processors (inc. Avangardco) are probably the far better bet. They’re mostly profitable & cashflow positive (but check that), and many are cheap – in absolute terms, and particularly in relation to their growth rates.
I mostly continue to focus on AVGR myself – their operational execution to date, their growth rate & results, and now their export entry approval to the EU are all compelling. I do highlight pretty much all the other agri-stocks here:
Cheers,
Wexboy
Martin said:
Thank you very much, Wexboy. I have read your articles.
I am not concerned about free-cashflow as long as operative cashflow is positive. At those high growth rates working capital, equipment and land can’t be financed organically, otherwise we would not have the oppurtunity to invest in ukrainian agribusinesses.
In the eu agribusiness is way more capital intensive and less labour intensive than in the ukraine. In order to increase efficiency to these levels capital is required.
One more advantage of avangardco is the effect of possible export-quotas in Ukraine. Avangardco could then buy cheap food off the ukrainian market (under world market price) and still export eggs, because due to the small egg-producers I think no quota will come for egg-exports. Didn’t find a company with better risk/reward profile than avangardco so far. Companies, I checked, are no asset plays, which means they are not priced for bancruptcy and I will have to go for quality.
Wexboy said:
Yes, I certainly don’t object to companies re-investing all of their operational cashflow, if the investment opportunity is compelling. Trouble is, many of these companies are even necessarily operating cashflow positive! And if they are, there’s no attempt to restrict their capex to match operating cashflows. Yes, you cn probably justify that from an IRR perspective (like all projects up-front!), but IRRs become meaningless when you run out of money or you start diluting your shareholders to hell with poorly timed/priced placings. There has to be a better balance between investment opportunity & funding.
But I’ll be keeping a v close eye for a potential inflection point. Meanwhile, the asset-lite companies appeared to offer the better opportunity – and like you are now, I concluded Avangardco certainly seems to offer the best combination of growth, value & safety in this space!
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Assaf N said:
Great post ! Great questions !
Did you get a reply for the letter above? Would be nice to see their reply. Can you post it?
I also sent them an email with questions and got a very detailed reply. Nice to see that they are very friendly towards shareholders.
Wexboy said:
I’m delighted to hear about your detailed reply – judging by that, the website, etc. Avangardco have made a determined effort from day 1 to have a world class IR function & response. Yes, they have replied to me & indicated that share buybacks are potentially on the menu.
Unfortunately, vs. fact-based queries, letters & recommendations re corporate actions/strategy are not so clear-cut – by their very nature, you really can’t confirm a complete response & success until something actually happens – which of course the company can’t/won’t flag in advance.
Unfortunately, I suspect management are more focused on operational strategy than ever – not something we shd complain about, though! Their major capex expansion (Avis & Chornobaivske) appears nicely on schedule & of course that ties in perfectly with the granting of EU export approval – so we’re witnessing a big ramp-up here. On the other hand, one can only hope this leads to a major rally in the share price…in due course (though why it hasn’t shifted the price already, I don’t know!?), so this could be the last/best chance for AVGR to implement a high-impact share buyback.
http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11435360
Wexboy said:
12-Nov-14:
Technicals often save you frm worse news…once support ’round $7.60 broke, Avangardco $AVGR:LI was only going to inflict more pain: I’m out
$AVGR:LI Nt material, as I previously reduced to a 1.3% holding, bt technical brk signaled a return to low $6s
$AVGR:LI The fact mkt/investors ignored v satisfactory results (in light of lcl situation) & actual div announcement was also telling
$AVGR:LI Never expected to see a sub-$6 price, bt sometimes value dsn’t matter…dirt cheap will turn into ridiculously cheap
$AVGR:LI Cn’t discern outcome of Ukraine situation, if there is one… But in the end, mkts inevitably overcome adversity
$AVGR:LI But who nds to see what kind of time & shr price lows it takes before tht happens…
$AVGR:LI is cheap at nrly any price, so happy to buy agn at higher prices if/when there’s eventual clarity re Ukraine & mkt
$AVGR:LI Don’t average down, pay up for confirmation instead…
08-Sep-2014: Trimmed my Avangardco $AVGR:LN portfolio hldg frm 1.9% to 1.3%…who knew such a hated investment cd still still yield a reasonable profit?! Prompted by my exposure to another frontier mkt – an increase in my Vinacapital Vietnam Opp Fund $VOF:LN portfolio hldg frm 3.3% to 3.9%
Ukraine approved fr chicken/egg exports to the EU http://avangard.co.ua/eng/press-centre/news/e/year/2012/id/210/ Some additional (administrative) steps will delay the actual commencement of exports for, say, 3-4 months.
Avangardco (AVGR:LN) is primed & ready! I topped up to a 3.4% holding on the news. AVGR now up +5.5% today
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Wexboy said:
Hi David – so I guess you’re not investing in many of the US tech & (social) media companies either?! A majority stake’s not ideal, of course, but it is what it is…it’s certainly not deliberately egregious like the design dual-class/super-vote share structures.
Oddly enough, investors are now embracing US companies like that, while Ukrainian companies are reviled. But sentiment comes & goes… And you don’t get paid for this risk in the US – at least a Ukrainian company like Avangardco offers high growth & a 3.0 P/E to compensate. But you’ve got to invest in & live with whatever let’s you sleep at night, so yes this certainly wouldn’t be for everyone. Then again, personally, the debt & growth outlooks for the Western world actually keep me up at night far more 😉
btw Just to clarify – I don’t believe Avangardco shareholders will ultimately end up invested in (or squeezed out of ) a private company.
Cheers,
Wexboy
David Fehily said:
Hi Wexboy ..
Sounds a fantastic company but that chairman holding plus a potential merger into his 100% owned private company is a serious dampner on the whole picture ..
Sorry I’m out
df