AB East West Agro : čia

East West Agro	Enlight Research
Machinery	Baltics - Lithuania
March 9, 2023	Commissioned Research - 2022 Update

Dividend raised +90%

The exclusive Lithuanian distributor of Massey Ferguson (MF) tractors, East West Agro (EWA) has posted record performance since our initiation report in March last year. We expect continued strong performance and raise our dividend and Fair value.

Record performance

In 2022, the number of tractors sold increased by 21% to a record level 171 (est. 12% increase to 158). This together with strong aftermarket sales (service & parts) lead to an all- time-high Sales and Net profit of EUR 43m (est. 40m), and EUR 3.4m (est. 2.2m), respectively. We foresee the solid growth to continue and forecast 8% growth in tractors sold this year to 185, and 8.5% sales growth to EUR 46m.

Fair value range (EUR)

Bull (term. EBIT marg. 8.5%)	24.03
Base (term. EBIT marg. 6.0%)	22.00
Bear (term. EBIT marg. 3.5%)	19.98
Key Data
Price (EUR)	16.60
Ticker	EWA1L
Country	Lithuania
Listed	FN Lithuania
Market Cap (EURm)	16.60
Net debt (EURm)	-2.1
Shares (m)	1.2
Free float	13%

Debt free and Cash flow positive = raised dividend

Following the repayment of the expensive MBO loan in 2020, and the redemption of its 12% bond in 2021, the company is effectively debt free. This together with healthy profit outlook prompts us to raise our dividend forecast for 2022 by 92% to EUR 1.25/shr. (prev. 0.65), equal to a 6.3% net yield (after dividend withholding tax).

Base case Fair value EUR 22.00/shr

The EWA share is up 38% since our initiation report last year, but we see more potential. We raise our sales by ~6% and EPS by 38-52% in 2023-24. Our Base case Fair value per share is increased to EUR 22.00 (20.00), implying an upside of ~30%.

20,00
18,00
16,00
14,00
12,00
10,00
8,00
6,00											02/23
03/22	04/22	05/22	06/22	07/22	08/22	09/22	10/22	11/22	12/22	01/23
		OMXBBGI			East West Agro

Key figures (MEUR)

2021

2022

2023E

2024E

2025E

Price range

Net sales	35.6	42.7	46.3	49.1	51.6
Net sales growth	20.9%	20.0%	8.5%	6.1%	5.0%
EBITDA	3.3	5.0	5.5	5.5	5.6
EBITDA margin	9.3%	11.6%	11.8%	11.2%	10.9%
EBIT	2.6	3.9	4.1	4.3	4.5
EBIT margin	7.3%	9.2%	8.8%	8.7%	8.7%
EV/Sales	0.3	0.3	0.2	0.2	0.1
EV/EBITDA	3.5	2.8	2.1	1.6	1.1
EV/EBIT	4.4	3.6	2.8	2.0	1.4
P/E adj.	6.5	4.7	4.7	4.6	4.3
P/BV	1.8	1.6	1.3	1.1	1.0
EPS adj.	2.05	3.39	3.50	3.65	3.83
EPS growth adj.	70.07%	65.62%	3.16%	4.17%	5.14%
Div. per share	0.60	1.25	1.30	1.35	1.40
Dividend yield	4.48%	7.53%	7.83%	8.13%	8.43%

Source: Company data, Enlight Research estimates

52-week high	17.00
52-week low	12.30

Analyst

[e-mail]

Coverage frequency

On demand

Enlight Research

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March 9, 2023

East West Agro

Key takeaways

Tractor sales at record level

The company exceeded our full-year 2022 expectations on the key metric - number of tractors sold (the number of harvesters sold was below forecast but it is a less important product). In 2022, the number of tractors sold increased by 21% y-on-y to 171 vs. our estimated increase of 12% to 158. The number of tractors sold was the highest ever in EWA's history as was the tractor revenues of EUR 21.8m (51% of total revenues). The strong new tractor sales increase the active machine park, which has a positive long-term effect on the highly profitable aftermarket (service & parts). The typical industry gross margin on machinery spare parts is around 60% vs. 7-10% for new machinery sales. In 2023, we forecast continued solid growth (+8%) in the number of sold tractors albeit not as high as in 2022, driven by continued high grain prices. The strong new machine sales implies that around 60% of fixed costs are covered by stable aftermarket sales (up from around 30% 2-3 years ago). In 2-3 years, we believe around 80-90% of fixed costs could be covered by aftermarket sales, which lowers the risk in the business model.

EWA 2022 estimate vs. actual sold tractors and harvesters (units)

171

158

			35	30
Sold tractors (units)		Sold harvesters (units)
		2022 estimate		2022 actual

Source: Company reports, Company press release

EWA Tractors sold (units) and Growth (y-on-y)

250				44%							50%
									196	204	40%
200								185
					171			30%
150				141	141						20%
124					21%
								10%
		98
100
6%							8%	6%		0%
							4%
					0%
										-10%
50
											-20%
0		-21%								-30%
2018	2019	2020	2021	2022	2023E	2024E	2025E
				Sold tractors (units)			Growth (y-on-y)

Source: Company reports, Company press release

Enlight Research

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March 9, 2023

East West Agro

Established number two aspiring for top spot

Based on the number of sold tractors, EWA increased its tractor market share to 18.3% in 2022 from 17.5% in 2021. This means EWA and its Massey Ferguson (MF) tractor brand is now well established as the number two player (has been number two or better since 2017) in the Lithuanian market and is challenging John Deere for the number one spot. In our view, Valtra's strong market position in 2022 (no. 3) was due to them having less supply chain problems compared to others. We do not foresee Valtra to retain the number three position this year. We expect both John Deere (Dojus Agro) and MF (EWA) to keep their respective number one and two position in the forecast period 2023-25. If EWA continues to grow its active machine park, they could be a serious contender for the top spot in the Lithuanian tractor market (farmers usually stick to the same brand when changing tractor).

Lithuanian Tractor Market Position

1	1
2	2
3	3
4	4
5	5
6	6

1

1

2 2

3

3

1. 4
2. 5

6

6

1	1
2	2

3 3

4

4

5 5

6

6

	John Deere
1	1
	MF
2	2
	Valtra
3	3

4 4 Case

5	5 CLAAS
	New Holland

6

2015	2016	2017	2018	2019	2020	2021	2022
		John Deere	Massey Ferguson		CLAAS
		Case		New Holland		Valtra

Source: EWA

Lithuania
Top 5 tractor brands (units sold)
		2015	2016	2017	2018	2019	2020	2021	2022
1	John Deere	146	314	169	191	103	119	178	211
2	Massey Ferguson	40	125	117	124	98	141	141	171
3	CLAAS	16	86	51	49	59	70	127	87
4	Case	127	194	108	101	50	115	101	107
5	New Holland	99	123	106	97	94	82	92	87
6	Valtra	72	95	62	84	49	77	63	143
	Other	163	211	105	108	86	94	104	126
	Total	663	1148	718	754	539	698	806	932
Lithuania
Top 5 tractor brands (mkt. share)
		2015	2016	2017	2018	2019	2020	2021	2022
1	John Deere	22%	27%	24%	25%	19%	17%	22%	23%
2	Massey Ferguson	6%	11%	16%	16%	18%	20%	17%	18%
3	CLAAS	2%	7%	7%	6%	11%	10%	16%	9%
4	Case	19%	17%	15%	13%	9%	16%	13%	11%
5	New Holland	15%	11%	15%	13%	17%	12%	11%	9%
6	Valtra	11%	8%	9%	11%	9%	11%	8%	15%
7	Other	25%	18%	15%	14%	16%	13%	13%	14%
	Total	100%	100%	100%	100%	100%	100%	100%	100%

Source: EWA

Enlight Research

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March 9, 2023

East West Agro

Strong dividend outlook

After paying back its expensive MBO loan in 2020 (14-21% interest rate), and redeeming its 12% bond in 2021, the company is basically debt free. This in combination with projected healthy cash flows of around 4m per year in the forecast period 2023-25E means the dividend outlook is positive (especially given the limited investment need in the upcoming years). For 2022, we expect a dividend of EUR 1.25 per share equal to a yield of 7.4% (net yield 6.3%), which more than double the 2021 dividend of EUR 0.60. In 2023, we forecast a dividend per share of EUR 1.30 equal to a yield of 7.6% (net yield 6.5%). Our estimated dividend per share is increased by EUR

0.05 in 2024, and 2025, which improves the yield to around 8% (net yield 7%).

Dividend & Dividend yield

1,60

1,40

1,20

1,00

0,80

0,60

0,40

0,20

0,00

										9,0%
							1,35	1,40	8,0%
						1,30
				1,25			8,2%
					7,9%
							7,0%
						7,6%
				7,4%
							7,0%
						6,5%	6,8%	6,0%
				6,3%
								5,0%
			0,60							4,0%
	0,35	3,5%							3,0%
	3,0%
									2,0%
	2,1%								1,0%
	1,8%
										0,0%
	2020	2021	2022	2023E		2024E	2025E
		Dividend per share (EUR)		Dividend yield		Dividend yield (after 15% tax)

Source: Company reports (historical), Enlight Research (forecast) Based on share price of EUR 17.00

Dividend per share & Payout ratio

DPS (EUR)

1,60						60%
					1,35	1,40
1,40				1,30
		1,25		50%
1,20						50%
1,00						40%
0,80		37%	37%	37%	38%	30%
	29%	0,60
0,60
					20%
	0,35
0,40
0,20						10%
0,00							0%
	2020	2021	2022	2023E	2024E	2025E

Ratio (%)

Dividend per share (EUR)		Dividend payout ratio

Source: Company reports (historical), Enlight Research (forecast)

Enlight Research

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March 9, 2023

East West Agro

Valuation

Peer valuation

There are no listed pure agri distributors. Therefore, our peer group consist of construction machinery focused distributors as well as one automotive distributor. These peers have a similar business model to EWA and hence the valuation multiples could be relevant, despite significantly larger market caps. See below for a short peer description:

Ferronordic (listed in Sweden) is mainly a construction machinery and truck distributor. The Company's main brands are Volvo Construction Equipment and Volvo Trucks while its main market use to be Russia. In December last year, the Company surprised the market positively by divesting its Russian operations for SEK 1.1bn after debt repayments (share gained 88% from SEK 50 to 94 on the news). Following the divestment of the Russian operations, the company's main market is Germany where it is the authorized dealer for Volvo and Renault Trucks in certain regions of Germany. According to ABG Sundal Collier commissioned research, the company has SEK 66 per share in net cash that could be paid out or used for acquisitions.

Wajax Corporation (listed in Canada) is a machinery distributor in Canada to the construction, forestry, and mining industry. Examples of brands distributed are Hitachi, Hyster, and Tigercat.

Bilia (listed in Sweden) is a car dealership. Its main market is Sweden, but the company is also active in Norway, Germany, Luxembourg, and Belgium. Examples of brands sold are Volvo, BMW, Toyota, Mercedes, Renault, Lexus, MINI, and Porsche. The company also has two internet based auction sites.

Conclusion. Based on 2023E EV/EBITDA, EWA is trading at a discount of around 50% to the peer average (2.7x vs. peer avg. 4.9x). Applying the 2023E average peer EV/EBITDA multiple of 4.9x to EWA, implies a share price of EUR 29.12, indicating an upside of around 70%. Worth noting is that the forecast dividend yield for EWA is around 8% vs. zero for Wajax and around 6% for Bilia. Given Ferronordic's large cash position, the company could make a large extra dividend payout i.e., the dividend forecast could differ substantially from the outcome.

Machinery & Auto distributors							Div.	Div.	Div.
			Price	Mcap (m)	EV (m) EV/EBITDA	EV/EBITDA	EV/EBITDA	yield	yield	yield
Company	Ticker	Ccy	(last)	(last)	(last)	2022	2023E	2024E	2022	2023E	2024E
Ferronordic*	FNM	SEK	93.70	1,362	405	0.8	3.2	2.8	8.0%	0.5%	0.8%
Wajax Corp.	WJX	CAD	23.97	513	761	4.6	4.7	5.2	0.0%	0.0%	0.0%
Bilia	BILIA	SEK	139.40	13,459	18,235	6.5	6.9	6.5	5.7%	5.7%	5.7%
Average						4.0	4.9	4.8	4.6%	2.1%	2.2%
Average excl. Ferronordic				5.6	5.8	5.8	2.9%	2.9%	2.9%
East West Agro	EWA	EUR	17.00	17	15	3.0	2.7	2.7	7.6%	7.9%	8.2%

Source: Enlight Research (estimates East West Agro), MarketScreener (Wajax consensus, Bilia), ABG Sundal Collier (Ferronordic), Based on prices on 3 March 2023

*Company has a large cash position after divestment of Russian operations so dividend forecast could differ substantially from the outcome.

Enlight Research

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