Adecoagro IPO: Emerging Markets, Commodity Play

NEW YORK (IPOfinancial) -- Perhaps the worst-kept secret on Wall Street in the last year and a half has been the across-the-board surge in commodity prices. Between the growing wealth of emerging market countries and the reaction to deficit spending by large economies, the conditions are ripe for producers of raw goods to grow rapidly.

Adecoagro (AGRO), is a diverse South America-based agricultural company with separate business lines spanning farming, cattle, land transformation and energy, all of which benefit from current trends.

• Adecoagro SA: AGRO
  
• Lead Underwriter: Credit Suisse
  
• 28,571,000 Common Shares
  
• Current Price Range: $13 to $15
• Deal Size to the mid-range: $400 million
  
• Week Due Jan. 24, 2011
  
• Sector: Agricultural Operations

The company has seen its sales explode, with a CAGR of 48% from 2007 to 2009 and +38% improvement in the first three quarters of the year. Among the key factors for growth has been sales in corn and soybean, which are up +112% and +77%, respectively, in the first nine months of 2010 from the comparable period in 2009. That being said, the largest segments by total revenue remain rice and ethanol, the latter of which will expand production following the allocation of IPO proceeds.

At first glance, it may be puzzling as to why a company growing so fast, with a reasonable debt structure, is still not recording an accounting profit. In reality, AGRO has had to incur non-cash expenses that have skewed its earnings. Even though higher food and cattle prices have increased sales, the accounting benefit is somewhat offset because the markup in total inventory value has made depreciation expenses much higher.

In the first nine months of 2010, it incurred more than $100 million in charges as a result of faster depreciation and amortization. It also ran into a problem in its sugar market last year, as sugar prices fell by 50% from their early 2010 high of $30 before making a late-year recovery to a 30-year high.

As with many foreign listings, the clarity provided into quarterly results is limited, but we maintain a positive view on worldwide demand for the products that AGRO produces. With the addition of about $280 million of proceeds to fund new farmland acquisitions and a new sugar and ethanol mill in Brazil, strong earnings growth will remain in the cards.