Systematic internationalisation strategy
Since 2009, Baywa AG Vink. NA O.N. (LONDON:0AH7)’s management has strengthened the group by entering international markets, developing global procurement and distribution capabilities, and diversifying into the renewable energy market. This enables the group to benefit from growth in emerging markets and reduces the impact of weather-related variations in agricultural commodity prices. In parallel, management has exited from non-core or underperforming businesses, eg selling off certain building merchants’ sites in H114.
Execution of internationalisation strategy
In 2009, BayWa entered the renewable energy segment with the formation of BayWa r.e., expanding this with energy generation installations in the UK, France, Scandinavia and the US. New Zealand-based fruit distributor Turners & Growers was acquired in 2012, strengthening trading links between the northern and southern hemispheres. The acquisitions of Cefetra and Bohnhorst in 2013 and a Romanian agricultural trader in Q115, as well as the establishment of trade offices in Italy and Spain in Q414, have made BayWa one of the world’s five largest agricultural traders, improved access to the Baltic coast, Black Sea, Southern and Eastern Europe, and enhanced return on assets. In FY14 around 45% of operating profit was generated from activities developed from 2009 onwards.
Q115 year-on-year comparisons distorted by weather
Q115’s weather did not repeat the unusually mild conditions experienced in Q114, so year-on-year comparators are of limited value in predicting the FY15 outcome. Q115 group revenues declined by 4.5% year-on-year to €3,450m as the benefits of the acquisition of Apollo Apples, expansion of grain trading activities and commissioning of four solar parks in the UK were offset by lower demand for fertiliser, agricultural equipment and building materials, and lower oil prices. EBIT moved from a €4.3m profit to a €6.4m loss, which is more typical for BayWa’s first quarter. Management is confident of improved profitability during FY15 because of the enlarged agricultural trading capability (c 40m tonnes expected by 2020) and completion of power projects (over 300MW capacity scheduled for 2015).
Valuation: Contribution from renewables not in price
BayWa’s prospective P/E multiple is close to the mean for our sample of global agricultural product wholesalers (12.5x) but substantially lower than our sample of renewables (20.3x) or building materials (18.2x) companies. This gives potential for share price appreciation if the contribution from these divisions is recognised.
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