Financial analyst says AGT has ‘shockingly large’ debt while company president says company is financially stable
The president of AGT Food and Ingredients is literally laughing off a report that his company is teetering on bankruptcy.
“I’m sitting here on a Friday afternoon and it’s raining and I’m not feeling like I’m flirting with financial ruin,” said Murad Al-Katib.
“In fact, I feel the opposite.”
The report was written by Auger Analyst, a new contributor with Seeking Alpha, a website that provides stock market insights and financial analysis.
“AGT is a capital-heavy, cyclical commodity business with slim margins and perpetually low returns on capital,” stated Analyst.
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“Despite this, the business has strapped on a shockingly large and increasingly burdensome debt.”
Analyst said AGT adds back an unusually large amount of “non-recurring expenses” to artificially inflate its earnings before interest, taxes, depreciation and amortization (EBITDA).
AGT’s lenders have a stipulation that the company’s EBITDA to interest expense ratio has to be less than 1.75 to 1. The ratio is currently at 1.72 to 1.
But if AGT had reported a normal level of non-recurring add-backs the company would have violated its interest covenant by a wide margin.
“With the covenant tightening to 2.00x coverage by the end of Q3-18, AGT needs earnings to inflect upwards in a hurry,” the report said.
AGT’s share price dropped a little over two percent following the publication of the report and has since regained some of that ground.
Al-Katib said the company’s financial statements are audited by KPMG, which had no problem with the add-backs that were used and neither did its syndicate of lenders.
One of the add-backs was India’s import duty on a cargo that was in transit to that destination when the duties were applied.
He said nobody predicted the level of duties that India applied, so it was definitely an extraordinary item that temporarily affected earnings.
Al-Katib scoffs at the notion that the company is in trouble when it has more than $600 million in liquid current assets such as inventories and receivables that could easily pay off its $500 million of debt.
“I can tell you, I’m not losing any sleep,” he said.
Al-Katib said some of the smartest investors in Canada have an interest in the company. In August of 2017 AGT announced that Fairfax Financial Holdings Limited invested $190 million in the company in return for interest bearing securities that mature in 99 years.
“That is $190 million of permanent capital from one of the most prolific investors in Canadian history, Prem Watsa,” he said.
The company was also extended $400 million in credit from a syndicate of Canadian banks in late 2017.
“Sure the debt level is high today because earnings have been constrained because of the India situation,” said Al-Katib.
But AGT is able to weather the storm because it is well-capitalized and diversified company.
“I’ve gotta tell ya, if we were just a pulse processing company today reliant on India it’s tough slogging out there,” he said.
Analyst said if conditions in the pulse processing sector continue to deteriorate AGT will be forced to ask the banks for relief from its debt covenants or be forced to accept further “dilutive capital” from Fairfax.
The company may be forced to sell off some of its bulk processing plants or rail assets to lower its debt but they would likely fetch “distressed prices,” said Analyst.
AGT is doing the opposite. The company is part of a buying group that recently purchased the Hudson Bay Railway and the Port of Churchill. It is also building a rail consolidation centre in Delisle, Sask.
