Auga : Enlight Research AUGA group, AB apžvalga, 2021 m. gruodžio 16 d.

Auga Group	Enlight Research
Food Production	Baltics - Lithuania
December 16, 2021	Commissioned Research - Q3 2021 Update

Bad weather but positive outlook

The Q3/21 report was below expectations due to unfavorable weather burdening the crop segment, making 2021 a "lost year". We regard 2022 as promising with hopes for normalized weather, sustained high crop prices, and launch of the Auga green tractor.

2021 weather has no impact on 2022

The record summer heat led to the second worst harvest in Auga's history prompting a EUR 7.9m negative FV adj. in Q3/21 resulting in an EBIT loss of EUR 11.2m. Hence, we lower our 2021 EBIT estimate to a loss of EUR 5.3m (from 6.7m profit). The unfavorable weather in 2021 has no impact on the 2022 harvest. Assuming normal weather, and sustained higher crop prices vs. 2021, we regard the 2022 outlook as positive with EBIT recovering to EUR 9.5m.

Fair value range (EUR)

Bull (term. EBIT marg. 10%)	0.84
Base (term. EBIT marg. 8%)	0.61
Bear (term. EBIT marg. 6%)	0.38
Key Data
Price (EUR)	0.50
Ticker	AUG1L
Country	Lithuania
Listed	Vilnius (Lithuania)
Market Cap (EURm)	113.71
Net debt (EURm)	105.02
Shares (m)	227
Free float	45.00 %

Commercial launch of green tractor

The planned launch of the Auga biomethane tractor in H2/21 contributes to our positive 2022 outlook. We are comforted by the agreement with a manufacturing partner that can scale up production (expected in 2023) without any need for large investments from Auga.

Base case FV virtually unchanged

Our Base case Fair value is lowered slightly to EUR 0.61/shr (0.63). Worth noting is that our forecast does not include any revenues from the green tractor. A successful launch could have a substantial impact on revenues starting from 2023.

1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20										10/21	11/21
12/20	01/21	02/21	03/21	04/21	05/21	06/21	07/21	08/21	09/21
		OMXBBGI			Auga Group

Key figures (MEUR)

2019

2020

2021E

2022E

2023E

Price range

Net sales	73.0	83.1	78.5	90.2	97.8
Net sales growth	33.4%	13.7%	-5.6%	14.9%	8.4%
EBITDA	15.7	20.8	10.2	25.7	28.7
EBITDA margin	21.5%	25.0%	13.0%	28.5%	29.3%
EBIT	-0.4	6.9	-5.3	9.5	12.6
EBIT margin	-0.6%	8.3%	-6.7%	10.6%	12.9%
EV/Sales	2.4	2.3	2.8	2.5	2.2
EV/EBITDA	11.0	9.3	21.5	8.7	7.5
EV/EBIT	-394.0	28.0	-41.5	23.4	17.1
P/E adj.	-17.7	57.0	-10.5	24.4	14.2
P/BV	0.9	1.1	1.4	1.3	1.2
EPS adj.	-0.02	0.01	-0.05	0.02	0.04
EPS growth adj.	na	na	na	na	71.79%
Div. per share	0.00	0.00	0.00	0.00	0.00
Dividend yield	0.00%	0.00%	0.00%	0.00%	0.00%

Source: Company data, Enlight Research estimates

52-week high	0.56
52-week low	0.43

Analyst

[e-mail]

Coverage frequency

4x per year

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Auga Group

Key takeaways

Crop growing segment cause estimate miss

The Q3/21 Gross profit for the Crop segment was negative EUR 8.0m compared to our estimated profit of EUR 2.1m. This EUR 10m negative deviation is equal to the negative Gross profit deviation at the Group level (loss of EUR 6.8m vs. estimate of profit EUR 3.0m) i.e., the Crop segment was the cause of the estimate miss for the whole Group (this is also true for revenues).

Crop segment & Group estimate deviations

(EURm)

2.0

0.3

0.0

-2.0	-0.4
-4.0
-6.0
-8.0
-10.0	-8.1
			-10.1
-12.0
		Sales		Gross profit
		Crop growing segment deviation		Other segments deviation

Source: Company reports, Enlight Research

What happened?

At the end of the previous quarter (Q2/21), the Crop growing segment's reported Fair value of biological assets appeared "ok" with a gain of EUR 4.5m. Consequently, we were surprised by the negative EUR 7.9m Fair value adjustment in Q3/21, leaving a reported Fair value of biological assets of negative EUR 3.4m for the 9M/21 period. The following factors were behind the negative Fair value adjustment:

• The hot summer resulted in much larger yield compression than estimated. The 2021 summer was the hottest in over a decade in Lithuania with the average temperature 3.8°C above the historical average. The record heat was known already at the publication of the Q2/21 report however, we did not know the extent of the negative effect it would have on the crop yields. The reported crop yield in the Q3/21 report was 18% below our estimate for Wheat (3.29 t/ha vs. estimate of 3.99) and 59% below our estimate for legumes (1.10 t/ha vs. estimate of 2.67 t/ha). For the 9M/21 period, the reported decrease in yields was 24% y-on-y.
• Limited benefit from wheat market price increase as organic wheat must be sold using longer contracts compared to conventional wheat that has a much more liquid spot market. This means the company contracted the majority of its wheat before the major upward move in market prices that started in July (the Euronext conventional wheat December 2021 futures contract increased from 200 EUR/t in July to more than 300 EUR/t in November).
• Lower than expected harvest means the share of contracted crops became larger than planned. We estimate the company planned to contract around 50% of the planned wheat harvest by the end of H1/21. However, as the

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harvest became smaller than planned due to lower yield, the actual share of wheat contracted was around 60% according to our estimate (a result of around 20% lower than expected harvest). The effect was even larger for legumes).

Crop segment quarterly Fair Value change (EURm)

6.0
		3.7					2.9
4.0
2.0	1.3		1.6	1.2		1.6
0.0
Q1/20	Q2/20	Q3/20	Q4/20	Q1/21	Q2/21	Q3/21
-2.0
-4.0
-6.0								-7.9
-8.0
-10.0
Source: Company reports
			2021 Yield (t/ha) compression
5.00		4.32
4.50	4.11
3.99
4.00			-18% vs. est.
3.50			3.29
					2.84
3.00					2.7	2.67
2.50
2.00								-59% vs. est.
1.50								1.10
1.00

0.50

0.00

				Wheat		Legumes
		reported 2020		Pre-Q2/21 Enlight est.		Post-Q2/21 Enlight est.		reported Q3/21
Source: Company reports, Enlight Research

Source: Euronext

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What about the future?

Clearly, the hot summer resulted in significantly lower yields than expected leading to the second worst harvest in Auga's history. We believe the negative effects of the low yields were fully visible in the 9M/21 report i.e., we do not see further negative Fair value of biological assets effects in the upcoming quarters. On the contrary, we see a EUR 0.9m upward revision of the Fair value in Q4/21 as the unsold crops is sold at much higher prices compared to the contracted prices reported in the 9M/21 report. Although positive, the expected upward Q4/21 Fair value revision is not enough to make 2021 a good year (our full-year 2021 estimated Fair value adjustment is negative EUR 2.4m).

For 2022, we expect a significant pick-up in the Crop segment's Gross profit - driven by (1) normalized yields, which assumes normal weather conditions, (2) higher crop prices compared to last year - if prices stay around current levels, the 2022 wheat price will be around 20% higher compared to 2021. In the Q3/21 investor presentation, the Company wrote that they already have preliminary offers for next year's harvest at 2-65% higher prices. For 2022, we forecast a positive Fair value of biological assets of EUR 7.5m, which is around the same level seen in 2020. To summarize, the poor harvest in 2021 has no effect on the 2022 harvest - normalized weather and sustained crop prices imply a significant improvement (in our Base case forecast).

Crop segment Fair value adjustment (EURm)

10.0							8.9
8.0				7.1		7.5
6.0	5.1
4.0			3.8
2.0
0.0
-2.0
-4.0					-2.4
	-3.4
				Record heat
-6.0		Drought
	2017	2018	2019	2020	2021E	2022E	2023E

Source: Company reports, Enlight Research (estimates)

	350
(EUR/t)	300
250
price	200
150
Wheat
100

50

0

Dec 21 Last price

Source: Euronext

Milling Wheat prices (EUR/ton)

			25%
			20%
				(%)
			15%	change
			10%
			Price
			5%
			0%
Mar 22	May 22	Sep 22	Dec 22

Price change since Enlight Research last AUG report in Sep

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Auga Group

Crop segment outlook

Key components	Outlook
	Management sees interest from clients to pay 2-
	60% more than last year for different crops. We
Price	believe key crops like wheat, could see at least
	20% price increase.
	Seeding for next year's harvest has been done on
	time. Winter has come with snow which protect
Yield	plants from frost. We believe condition of crops
	are satisfactory.
	Costs are under control as Wheat cost/ha has
	decreased by 11% and Legumes by 5% y-on-y.
Costs	We expect costs to rise in 2022, but the increase
	would be offset by higher grain prices.

Source: Company report, Company presentation, Enlight Research

FMCG, a rising star

The FMCG segment (soups, canned beans etc.) was back at +50% y-on-y sales growth rate after the "slow" 8% Q2/21 growth. This confirms clients changed behavior of placing fewer but larger orders resulting in increased lumpiness of sales between quarters. Even more impressive than the recovered sales growth rate, was the Q3/21 Gross margin of 35.2% (up from 24.3% in the previous quarter), which prompts us to increase our full-year 2021 FMCG estimated Gross margin from 20.0% to 26.5%. The FMCG segment is now by far the second biggest segment in the Group with an estimated 2021 Gross profit of EUR 2m, and we expect this to be the case in the coming years as well.

FMCG segment Sales & Gross margin

Sales (EURm)

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

2019

2020

2021E

2022E

2023E

Gross margin (%)

Sales		Gross margin

Source: Company reports, Enlight Research (estimates)

Gross profit per segment excluding Crop growing segment

(EURm)

4.0

3.0

2.0

1.0

0.0
-1.0	2019	2020	2021E	2022E	2023E

-2.0-3.0

Mushroom growing

Dairy farming

FMCG

Source: Company reports, Enlight Research (estimates)

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