Ten years ago, the share of sugar production in the overall revenues of Kyiv-headquartered agricultural giant Astarta stood at more than 70%. “That is when we set ourselves the task of diversifying our business segments. This [diversification] is the strength of the company,” Mykola Kovalski, director for marketing and communications, tells bne IntelliNews.
By 2016, sugar’s share in Astarta's revenues dropped to 48%. At the same time, the share of soybean processing increased to 20%, from 16% the previous year.
“Soft commodities have multi-directional trends: when sugar prices are on the rise, crop prices can decline,” Kovalski says. “Astarta is like a rocket that has several engines running on different fuels. All together, they provide the company’s sustainable profitability.”
In the first quarter of 2017, Astarta’s net profit increased by 64% y/y to €31mn, while the company’s Ebitda inched up by 2% to €44mn. In 2016, its net profit jumped by five times to €83mn, while its Ebitda increased by 16% to €162mn.
“Astarta’s diversified business model certainly helps to weather the crisis. Moreover, the company benefits from its high efficiency and the management’s ability to adjust operations to changing market conditions (eg by increasing the share of exports in total sales),” Marcin Gatarz, head of research at Pekao Investment Banking in Warsaw, tells bne IntelliNews.
Indeed, the company recorded 51% of exports in its total sales in 2016, compared with 36% a year before.
War-time recast
During the 2014-2016 political and economic crisis in Ukraine, the agricultural producer, which operates eight sugar plants in the country, was forced to “recast” its sugar sales, Kovalski says.
According to Kovalski, the sugar market in Ukraine shrunk as a result of the annexation of Crimea in 2014 and the conflict in the Donbas, as Kyiv no longer controlled part of this region. “Before, the market was worth about 2mn tonnes, but now it is about 1.6mn tonnes,” he says.
Moreover, the recent crisis has significantly diminished overall purchasing power in Ukraine. “We always thought that people would stop buying expensive cars and apartments in times of crisis. But people have reached a point where they are starting to economise on basic necessities. We can see that they are buying fewer confectionery products,” says Kovalski.
Trade wars between Kyiv and Moscow have added to Astarta’s difficulties. A significant portion of confectionery products made by Ukrainian companies used to be supplied to Russia and the countries of the Eurasian Customs Union. Today, this export has dried up, he explains.
In these crisis conditions, Astarta was able to re-channel its sugar sales from the domestic market to exports. In 2016, the company reported a record level of export sugar sales to global markets – almost four times higher than a year previously. Nevertheless, according to Kovalski, the process of restructuring was “painful”.
“Increased sugar exports help to offset FX risks and certainly, to some extent, they contributed to Astarta’s strong results,” Pekao’s Gatarz tells bne IntelliNews. “I forecast Astarta’s sugar segment to post a 9% yoy increase in Ebitda this year.”
Meanwhile, the company will receive a $25mn loan from Dutch development fund FMO, it said on July 19. The funds will be used for the modernisation of its sugar plants and the construction of a wastewater treatment plant. The loan is the third facility provided by FMO since 2008.
The share of soybean processing in Astarta’s consolidated revenues stood at 14% in January-March of 2017. However, this business segment has also been hit by the crisis. “We produce grist, which is used [by other companies] for chicken and pig feed. However, people have become poorer – they are buying less meat. So the demand for grist is stagnating in Ukraine.”
At the same time, Astarta is refocusing soybean crushing products sales to exports (their share in the segment’s revenues stood at 82% in 2016). “With non-GMO high protein content of the product we were fast to redirect,” says Kovalski.
Astarta's milk production segment (6% of the company’s consolidated revenues in the first quarter) is also under pressure. The trade war with Russia has led to the collapse of exports in dairy products made by Ukrainian companies, particularly hard cheese. This has meant, in turn, a significant drop in the price of raw milk.
“Nonethless we are expecting a recovery [in profitability] on the domestic market, when the situation in Ukraine improves,” says Kovalski. “Astarta will be in a favourable position as it continues to develop its dairy business.”
Meanwhile, Gatarz believes that the volatility of soft commodity prices and the hryvnia’s exchange rate remain the key risks to Astarta’s medium-term earnings forecasts. “A solid balance sheet, a diversified business model and high efficiency should, however, help the company to perform relatively well, even if the market conditions are unsupportive,” he underlines.
Certificate mark
In May, Fairfax Financial Holdings, a Canadian asset manager with $27.6bn in equity investments as of the end of March, completed the acquisition of the second largest stake in Astarta, controlling 28% of the shares. Viktor Ivanchyk, Astarta’s founder and CEO, remains the largest shareholder with a 36% stake.
The deal was not the first of its kind for Fairfax on the Ukrainian market. In 2015, the company acquired a 5.35% stake in the Ukrainian egg producer Ovostar Union.
According to Kovalski, in the context of the 2014-2016 crisis the capitalisation of all Ukrainian public companies fell substantially. “At the same time, the quality of many of these companies, including Astarta, remains high,” he argues. “Fairfax is using the following rule of thumb when buying shares: to invest in a good business, which is however undervalued as a result of external circumstances over which the company has no control.”
Kovalski adds that for Astarta the deal means informal accreditation with a certain “certificate mark”, approving its quality. “We expect that this deal with lead to an increase in interest in the company from investors, and will boost its capitalisation. Because Astarta is currently trading at a low level, compared to similar companies.”
Meanwhile, the agricultural giant’s share performance has improved in 2016-2017. Last year, Astarta demonstrated the best share price performance among Ukrainian WSE-listed peers with 59% y/y upside in 2016. The company began the financial year with a share price of PLN34.5. At the end of the financial year, the share price closed at PLN54.05.
In mid-July, the farmer’s share price reached PLN64. Moreover, Gatarz says that Pekao’s target price for shares in Astarta stands at PLN81.20. “Hence, we believe the current market capitalisation does not reflect properly the company’s earnings generation potential. The entry of Fairfax may help to convince other investors of the company’s strength,” he says.