Tonkens Agrar — Calendar 2018 drought affects profits

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.

Revenues increased by almost 5% to €3.2m reflecting high potato prices following the poor harvest in calendar 2018. Management remains focused on improving capacity utilisation, and thus profitability, by attracting additional larger customers.

Segmental revenues increased significantly (by 30%) year-on-year to €2.9m. The extreme drought and heat during calendar 2018 resulted in yields that were substantially lower than the previous year, though in line with the national average. Wheat yield fell by 17% and barley by 20%. The potato yield was only half that of the previous year and onions only one third. However, the reduction in output across Germany and other parts of the EU resulted in higher crop prices. Since management had decided not to sell on prices agreed before the harvest, it was able to secure higher prices per tonne so total grain revenues were similar to the prior year. Tonkens was able to sell inventory left over from the calendar 2017 harvest and sold its potatoes from the calendar 2018 harvest at significantly higher prices than the previous year.

Segmental revenues decreased very slightly, by €0.1m year-on-year to €1.7m. This was primarily the result of a downwards movement in farmgate milk prices, which averaged 35c/litre compared with an average of 38c/litre in H117/18. Importantly, farmgate milk prices were at an acceptable level above the cost of production throughout the period.

The segment generated €1.1m revenues, which was the same as 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 fallen from a peak of €6.35 since the preliminary data for H118/19 was announced. They are currently trading on historical EV/sales and EV/EBITDA multiples that are above the mean for our sample of agricultural producers, reflecting Tonkens’ higher EBITDA margin, which is linked to the vegetable processing activity. We note that the current market capitalisation (€9m) is below net asset value (€10.4m) and substantially below the value of land and buildings at the end of December 2018 (€13.6m).

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