We raise our 12M target price for RusAgro by 24% to $16.9 (RUB1,264) per GDR as a result of our model update to reflect strong market prices on sugar and sunflower oil at the end of last year as well as an impressive EBITDA delivery in October-November. We continue to rate the stock Overweight (O/W) and see 40-43% upside potential from current levels. Dividend opportunities complement a solid fundamental case, as increasing the payout to 50% of the net income would imply a 7% yield in the 2H20 dividend tranche. We see RusAgro’s 4Q20 trading update (due on 1 February) as the main catalysts for the stock in the short term.
Strong price backdrop at the end of 2020, favorable market environment likely to continue into 1H21. Prices for sugar and sunflower oil spiked in Russia in 4Q20 amid lower y/y harvest numbers and the global market environment (oil). By the middle of December, the average market price of sugar jumped c.2x and that of sunflower oil by c.60% YTD. After the Russian government expressed concern about the rise, food producers and retailers (including RusAgro) implemented price caps on sugar and sunflower oil for the period from 20 December 2020 to 1 April 2021. This, however, will still allow the company to sell its products at very good price levels in the first months of 2021, as wholesale price caps were set 9-32% above RusAgro’s actual average sale prices seen in 3Q20. Overall, we expect the favorable market environment in sugar and oil to persist in Q1- Q2 until the beginning of the next season, being supportive for RusAgro’s operational numbers.
Lifting 2020-21 EBITDA forecast by 49-14%. We expect RusAgro to generate RUB49bn in revenue in 4Q20 and RUB158bn (+14% y/y) in 2020 on strong prices, which is 10% above our previous expectations. Management indicated that 11M20 EBITDA exceeded RUB30bn. 2020 EBITDA is likely to hit a record of RUB35bn (2x y/y, 22.5% margin) with the OCF providing a source for unfreezing certain investment projects (2020 capex guidance was raised from RUB15bn to RUB18-19bn) and deleveraging. We expect operational profitability to normalize in the high teens in 2021 as a result of market price premiums in sugar and oil fading out by the beginning of next season as well as cost inflation in the meat segment. Still, our new 2021 EBITDA projection of RUB29bn is 14% above our previous estimate.
Dividends complement an attractive fundamental case. The high price environment facilitates deleveraging (Net debt / EBITDA is expected to drop to c.2.0x by the end of 2020) and allow the company to be more generous on the dividend side. At its meeting in March, the RusAgro BoD is likely to increase the dividend payout ratio to 50% of net income (compared to a 41% average over the last five years) and apply it already to the 2H20 tranche. We estimate 2020 DPS at a historic record of $1.02 per GDR (8.5% yield) including $0.83 in 2H20 tranche (6.9% yield) to be paid out in April.
AGRO LI (O/W, TP $16.9/GDR) currently trades at 6.0x 2021E EV/EBITDA and 7.3x PE, offering a 4-39% discount to global diversified agricultural producers. We estimate RusAgro’s fair value per GDR at $16.9/RUB1,264 based on a 50/50 combination of multiples and DCF approach and see 40- 43% upside potential in the stock from current market levels. Our valuation implies 7.7-7.2x 2021-22E EV/EBITDA and 10.3x PE.