Agroton reports strong P&L, balance sheet in 2016

Farming company Agroton (AGT PW), operating in the partially occupied Luhansk region of Ukraine, reported improved profit and significant deleverage in 2016 in its annual report published on April 25. Its revenue increased 5% yoy to USD 44.2 mln, solely due to a 7x yoy surge in “service” revenue to USD 5.5 mln. Its EBITDA (based on our calculations) advanced 10% yoy to USD 25.5 mln, mostly due to a significant revaluation gain of agricultural produce (90% yoy rise to USD 31.0 mln). Its net income advanced to USD 21.8 mln in 2016, improving from USD 9.6 mln in losses posted a year before.

Agroton’s operating cash flow before working capital changes was USD -3.8 mln in 2016 (from USD +6.0 mln in 2015), but its cash flow from operations was USD 10.5 mln (+2% yoy). The company spent USD 5.3 mln for deleveraging (repurchase of its notes with a discount to face value), which enabled it to reduce its total debt by 58% yoy to USD 9.4 mln. Its net debt was USD -2.2 mln as of end-2016, a decline from USD +14.0 mln a year before.

The company remained a generous lender to its shareholder with loans receivable at USD 16.8 mln as of end-2016 (+3% yoy). Agroton agreed to postpone the loan’s maturity till the end of 2017, a move that has been regularly repeated since 2013.

The company’s auditor issued a qualified opinion based on its inability to confirm Agroton’s alleged inventories of USD 29.0 mln as of end-2016 (+47% yoy). The auditor blamed “war events” in the Luhansk region, which restricted access to the location of the inventories.

Alexander Paraschiy: The fact that Agroton was able to significantly deleverage to a negative value of net debt is encouraging. Also encouraging is its ability to generate positive cash flow from operations. At the same time, the company’s behavior remains unfriendly for minority investors – despite insignificant debt, it again (for the fourth time) postponed for one year interest payments on its debt that was due in January 2017. The continuous demonstration of poor corporate governance standards, as well as risks related to military actions in the Luhansk region – amid a lack of clarity about Agroton’s asset operations in the occupied parts (if any) – does not allow us to be bullish on Agroton stock.