Tonkens Agrar — Back to the black

Tonkens Agrar’s c 3,500 hectares of high-quality farmland in the Saxony-Anhalt region of Germany is the basis for a vertically integrated agricultural production group. It peels and chops the potatoes and onions grown on the farm in-house, adding value to the harvested vegetables. Manure from the dairy herd and residual material from harvesting and processing crops are used to generate electricity, creating an additional revenue stream that is relatively predictable and non-seasonal. Some of the maize grown on the farm is used as cattle feed, providing a buffer against rising feed prices.

Volumes of peeled and packaged potatoes and onions increased by 23%. Output benefited from successful marketing initiatives which enabled the business to meet its target of peeling 30 tons of vegetables a day over a longer period of time. However, the comparatively low prices realised for finished goods resulted in a €0.2m year-on-year decline in segmental revenues during the year ended-June 2018 to €5.2m. Management remains focused on improving capacity utilisation, and thus profitability, by attracting additional larger customers.

Segmental revenues increased by €0.4m year-on-year to €3.5m. This was primarily the result of a positive movement in farmgate milk prices. These rose from 22c per litre, below the cost of production, in July 2016 (start of H116/17), to peak at 40.21c per litre in November 2017 (mid-H117/18), before dropping to 31.81c per litre by May 2018.

Segmental revenues declined by €1.8m year-on-year to €3.1m. Although Tonkens outperformed nationwide average crop yields for winter wheat, winter barley, oil-seed rape and potatoes, it reported lower yields year-on-year for all crops apart from potatoes. This volume decrease was caused by unfavourable weather conditions, with the harvest repeatedly interrupted by rain. Cereal prices attracted only a modest premium compared to the prior year until concerns about the harvest in the EU and elsewhere started to push wheat prices up. Oilseed rape prices were lower than the previous year and oversupply of potatoes resulted in extremely low prices for unprocessed potatoes that were below the cost of production

The segment generated €2.2m revenues, which was similar to the prior year. Management does not intend to expand this segment because of the uncertainty regarding subsidies for electricity produced from either biogas or solar panels. The activity is retained because the biogas plants represent a mechanism for generating a steady and predictable income from the residual materials from both agricultural production and vegetable processing, as well as manure from the dairy herd. The waste product from the biogas plants, a mash, is used as a fertiliser on the group’s farmland, reducing the amount that needs to be purchased.

The shares have risen from €4.64 since the full-year results were announced. They are currently trading on a historical EV/sales multiple that is above the mean for our sample of agricultural producers and a historical EV/EBITDA multiple that is below the mean, reflecting Tonkens’ higher EBITDA margin. We note that the current market capitalisation (€9m) is substantially below both net asset value (€9.7m) and the value of land and buildings at the end of June 2018 (€13.7m).

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