Sales in fast growing regions lead the investment firm to raise its growth estimates for the company
Citi analysts are pleasantly surprised with Makhteshim Agan Industries Ltd. (TASE: MAIN), noting that the firm "is proving to be more sensitive to the improving market conditions than we, and probably the company itself, had expected this year. Part of the rationale for this is the bias of the group’s sales to Europe and South America, which are the fastest growing regions this year." Citi has raised its growth estimates, noting that "successful development of sales from products that have recently lost patent protection is also a key issue. However, it also appears to be the case that the farming community overall remains price sensitive and Makhteshim Agan's generic offering, which is typically priced at a 5% to 7% discount to the original brand, is benefiting disproportionately from the market upturn. This is the basis of the upgrade to our estimates. We expect the crop chemical market to be able to grow by 2% to 3% per year over the next three years and believe that Makhteshim will be able to expand at about twice this rate." As a result, Citi gives Makhteshim a "Buy" recommendation, claiming that "crop prices will stay high due to demand from biofuel producers. This should support crop chemical demand growth and industry margins. Within the context of this favorable environment, we expect Makhteshim Agan to deliver superior EPS growth and sustained strong cash generation." The investment house also expects the firm to look for purchases, noting that Makhteshim's "strategic plan includes acquisitions. In particular, operations that would boost its presence in Eastern Europe, Asia, and the US Corn Belt would complement and make sense. Additionally, companies that diversified the portfolio seed treatment, professional care (golf courses, lawn-care, etc) and potentially seeds are also likely to be on the table for consideration. We would expect any deal to enhance the long term potential of the group. It has a good track record on acquisitions. The company has financial headroom of about $1 billion before excluding the potential for new equity for this objective." Citi sets a target price of $40 per share, but rates the firm as high risk because of "inherent volatility of earnings caused by factors outside its control, such as the weather and competitor pricing strategies. The farming economy is cyclical but in an unpredictable way. Weather and government intervention have significant effects on demand. Makhteshim is a price taker, given its position as a generic producer. Aggressive pricing strategies from key competitors could impact its performance."
Published by Globes [online], Israel business news - www.globes.co.il - on August 23, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007