Citi has great expectations for generic agrochemicals producer Makhteshim Agan Industries Ltd. (TASE: MAIN), giving it a "Buy/high risk" rating with a target price of NIS 40, a 33% premium on today's opening price.
Citi notes that Makhteshim Agan is traded at 20% below its level before the company's profit warning in early January. "Since then, it has become clear that the crop chemical industry is highly optimistic about growth in 2008. Makhteshim Agan's prospects are excellent this year, in our view, not least due to high grain prices and the need for yield growth."
Makhteshim Agan said that its net profit was around $175 million on $2.08 billion in sales in 2007. Although sales were basically in line with expectations, Citi had predicted a net profit of $199 million before adjustments, and noted that the company had had a poor fourth quarter. Citi added, "Crop science is unpredictable, given that demand is influenced by the weather and government subsidies as much as grain/food pricing. The fourth quarter is seasonally weak but we had been expecting restructuring gains to have had a marked effect on EBIT. Unfortunately, there were a number of factors that went wrong but none of them were structural or likely to prove lasting challenges."
Citi comments, "Comparing Makhteshim Agan's results with those of its peers that have so far reported, what is interesting is that it actually performed well last year - indeed, best in class for sales growth. It was only beaten slightly by Monsanto (NYSE: MON) in EBIT growth (up 50%). Expectations were too high for the restructuring gains expected to fall through in the fourth quarter of 2007. The fourth quarter is always seasonally weak. However, currency moves, raw material cost increases and decisions to hike production and marketing investment ahead of an expected strong 2008 season led to the weaker-than-expected performance more than offsetting the forecast restructuring effects. We believe the company’s prospects for 2008 are good."
Citi concludes that the setback in Makhteshim Agan's share has created a buy opportunity: "We believe the potential for above-average, medium-term EBIT growth is high, the shares trade at a discount to its peers on all metrics and trade well below our view of their fair value. Confidence in Makhteshim Agan needs to be restored, so re-rating may take time, but we see significant upside potential in the stock."
Citi believes that Makhteshim Agan will report a net profit of $189 million on $2.08 billion revenue for 2007, and predicts that the company will report a net profit of $234.5 million on $2.92 billion revenue for 2008.
Published by Globes [online], Israel business news - www.globes-online.com - on February 25, 2008
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