With a bullish outlook for agriculture, Agrium looks like a top pick.
Dundee Capital Markets
The U.S. Department of Agriculture released its updated world agricultural supply and demand estimates (WASDE) Wednesday. Once again the report was overall bullish for the ag sector and crop prices in particular.
World stock-to-use ratios of all the major crops were forecast lower for the 2010/2011 marketing year with corn reaching a mere 14.7%, a level last seen in the mid-1970s on a 3.5% reduction in ending stocks.
All remain below their respective long-run average days of available inventory.
The implications are for higher crop and fertilizer prices going forward, supporting our view of a tighter supply environment amid rising demand for ag products. We believe these tight supplies will carry the recent momentum in the ag sector into the spring and beyond.
While fertilizer prices have risen considerably (about $30 per acre), farmer profits have grown about $430 per acre, making the increase in fertilizer prices only 7% of the total increase in profits. We expect farmers will recognize this and return for even more fertilizer for the upcoming spring application window.
We rate Agrium (ticker: AGU) at Buy (Top Pick) with a 12-month target price of 115.00 Canadian dollars. Our target price is based on a blend between our valuation matrix (using 2011 and 2012 estimates and based on North American large-cap comparables) and our net asset value. We believe Agrium is one of the best-positioned companies to take advantage of the strong ag fundamentals experienced late last year and in 2011 (rising demand, supply shocks, increasing prices, and strong farm economics). We believe that Agrium's significant and ever-expanding retail and distribution network will be the principle growth catalyst going forward supported by our forecast for rising nutrient prices in the Wholesale business.
We are restricted on Allana Potash [traded in Toronto].
We rate Hanfeng Evergreen [traded in Toronto] at Neutral with a 12-month price target of C$6.00. We feel several issues need to be addressed before our faith can be restored, including: 1) Communication among management (China)/management (Toronto) and management/street/investors; 2) Issues concerning Carbon Power importation and product concentration consistency; and 3) The burden of carrying inventory for Beidahuang and producing metric tons well in advance of delivery that could have been sold to customers in the same quarter.
We rate Migao [traded in Toronto] at Buy with a 12-month target price of C$10.00. Migao underperformed the S&P/TSX Fertilizer Index by about 24% (bear in mind that Potash Corp of Saskatchewan (POT) has a heavy weighting within the index) in 2010, but the company continues to experience very strong demand for its specialty potash fertilizer from tobacco, fruit and vegetable growers, and we continue to expect strong earnings growth ahead from capacity expansions, some of which have begun commercial production.
We rate Hemisphere GPS [traded in Toronto] at Neutral with a 12-month target price of C$1.05. After an extensive run-up in the second half of 2010, we feel the stock is fully valued given the mediocre results it has been reporting. We still believe in the company and expect orders to rebound in 2011, but we are hesitant to raise our recommendation and target price until the company reports a marked improvement in sales.
We rate Asia Bio-Chem Group at Buy with a 12-month target price of C$2.75. Asia Bio-Chem recently completed the relocation and upgrade of its Chang-tu corn-processing facility and an inter-modal loading dock at the new Daqing facility. Moreover, the company has plans for downstream integration to manufacture crystallized glucose. Asia Bio-Chem now entering a year of full production from both facilities and a step up in earnings. With full production, the aforementioned growth initiatives, and the rising price of sugar (glucose/fructose are sugar substitutes), we believe the company is poised for sustained growth over the next two years.
-- Richard Kelertas
-- Joshua Bridges
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