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Created
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20 Jun 2009
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Provider
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KBC Securities
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Industry type
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Agriculture
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Type of access
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Free
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Overview:
Contents:
Business description: Zarneni Hrani Bulgaria (ZHB) is the largest domestic agricultural company. It operates in five business segments: oilseed processing (64% of total revenues in 2008), storing and trading agricultural commodities (21.66% of total revenues in 2008), production and sale of biodiesel (7% of 2008 revenues), sale of fertilizers and other agricultural chemicals (5% of 2008 revenues) and port management services.
Sector outlook: We have a positive view on Bulgaria’s agricultural sector. Global population growth and rising incomes mean that global food production will have to double by 2050. Bulgaria is not expected to experience demographic expansion in that period and is therefore likely to remain a net exporter of agricultural products. We expect Bulgaria’s agricultural output to expand in the years ahead, helped by the availability of EU funding for local farmers and better land utilization.
Investment thesis: ZHB’s grain elevators are strategically concentrated in Bulgaria’s most important agricultural regions and in close proximity to several commercial ports. The firm will also benefit from rising global demand for biodiesel. ZHB is expected to
expand into the production of agricultural commodities, which will help ensure stable supplies and will improve the firm’s margins. This can be undertaken at a reasonable cost due to low land prices in Bulgaria and low production costs relative to other EU nations.
Valuation: On a trailing 2009 P/E of 11,8x ZHB trades at a 5.0% discount to international peers, while a trailing 2009 EV/EBITDA of 7.8x puts the firm at a 23.4% discount. On a 1Q09 P/B of 0.5x ZHB is trading at a 49.9% discount to peers. We believe a small discount to international peers is warranted but the current discount is
excessive.
Latest financial results: ZHB’s revenues from oilseed processing declined by 34% y/y in 1Q09, although this was offset by additional revenues from a newly built biodiesel plant. The firm expanded its food processing business by acquiring a milling plant in 1Q09.