Investment Case

Large-scale crop farming has emerged in only a handful of countries worldwide that have been blessed with a combination of a natural suitability for crop production and the ability to operate without a dependence on subsidies. In fact, most pure farmers with listed equity are based in just four countries: Ukraine, Brazil, Russia and Argentina (or UBRA for short). Among these, Ukraine stands out as the most mature market, with a bevy of listed companies with track records of profitable farming operations.

Ukraine boasts 7 listed pure farmers, a half of the names globally with aggregate market capitalization exceeding USD 20 mln. As a percentage of the global agricultural equity universe, Ukrainians account for 30% if measured by landbank, 10% by MCap and 10% by free float capitalization. At least operationally, Ukrainian farmers tend to outperform the all-Ukraine national averages and the majority of their listed UBRA peers.

But fundamental differences exist – while most UBRA peers are vehicles for land speculation, Ukrainian businesses are mostly focused on farming business itself. This is the result of a carryover from Soviet times in that agricultural land trade is still prohibited in Ukraine; the rights to land are only granted on a lease basis.

Ukraine’s key advantage over LatAm countries – lower lease costs – seems to be generally balanced by the key disadvantage: an inability to earn as much revenue per hectare as Brazilian and Argentinian farmers due to a natural focus on higher-yielding crops.

To assess the fundamental value of listed Ukrainian farming companies, we focused on three factors:

• Location, the single most important factor for farming businesses throughout the world; in Ukraine it is the key determinant of crop yields compared to the Ukrainian national average.

• Operational efficiency, measured by (1) crop structure, (2) crop yields compared to the regions where companies operate, and (3) cost efficiency

• Management credibility, which is especially important for farming businesses; due to the inherent dispersion of crop production over both time and space, it is impossible to verify the veracity of key operating data – crop yields and production costs – presented by management.

Of the six stock recommendations we assign in this report, only one is a BUY: Industrial Milk Company. The others are either over or fairly valued (Mriya, SELL; MCB Agricole, HOLD; Agroton, HOLD), or have stock-specific risks that trump upsides (KSG Agro & Sintal Agriculture, both HOLD). At the same time three, Ukrainian food producers involved in farming as a secondary activity – Astarta, Kernel and MHP – looks operationally more efficient than pure farmers (yields and EBITDA/ha outperform all except Industrial Milk Company) and provide investors higher liquidity and better management credibility.

Recommendation summary

	Ticker	Landbank, ths ha	MCap, USD mln	Last price	Target price	Upside	Rec.
Agroton	AGT PW	171		PLN 7.9	PLN 7.8	-1%	HOLD
Industrial Milk Company	IMC PW	60		PLN 9.3	PLN 20.3	118%	BUY
KSG Agro	KSG PW	59		PLN 17.3	PLN 27.9	61%	HOLD
MCB Agricole	4GW1 GR	90		EUR 0.38	EUR 0.5	30%	HOLD
Mriya	MAYA GR	295		EUR 5.7	EUR 4.4	-23%	SELL
Sintal Agriculture	SNPS GR	145		EUR 1.0	EUR 1.5	52%	HOLD

Source: Concorde Capital, Bloomberg