Essay on AGT and SRC

Issues/problems

The main issue in the case is whether Saber River Capital should hold, buy more or sell AGT stock, given AGT’s recent moves to transition from a pulse and grain processing crop business to a more high-value food processor and trading distributor of key food brands. AGT has shown promise in recent years in moving toward more high-value food production and value-added products, and has moved to use its capital more effectively, although it faces tail winds in the form of declining pulse demand.

Diagnosis/analysis

Foremost, Saber River Capital needs to evaluate whether AGT’s transition will be effective. AGT has been a pulse crop business with a large global network of processing plants traditionally, with two current key business segments: pulse and grain processing, and supply chain management and distribution. AGT anticipated that global demand for a large scale stable supply from multiple origins of pulse ingredients will rise, and that it can successfully transition from a focus of currently on selling grains to global South, to expand into value add ingredients and branded food products for global North, building on its ability to source pulses and reformulate pasta. This indicates a move up the value chain in order to diversify away from commodity pulse handling and trading, an inherently volatile sector. For example, AGT is estimated to be able to generate $15-20 million in EDITBA from annual pasta production of 200,000 tonnes per year, building on their existing capabilities of a pasta producing facility under the Arbella brand. Furthermore, by consolidating more capabilities in house across the food value chain, AGT can prevent delays in its supply chain and comply to import requirements through more stringent enforcement.

Although this move is clearly an effective strategic move for AGT, it is uncertain whether AGT has the resources and capabilities to implement food ingredient production in a cost effective way. For example, part B of the AGT case showed that when Thornton decided to hold the stock, it continued to fall but rose in 2014 eventually. Despite significant progress on the food ingredient, capacity utilisation and value-added products front, AGT also had to have its pasta plant expansion put on hold. Clearly, AGT is moving into the higher value pulse ingredients processor and trading segments, and is upgrading their capabilities accordingly, but is unable to exploit the market opportunity effectively for now. AGT is also clearly not out of the woods yet, given that AGT’s income statement shows a decline in net earnings from 2012 to 2013. Its balance sheet also remains quite asset and liability heavy.

Furthermore, there are larger trends which should make Saber River Capital cautious. Pulse consumption per capita is on decline as populations urbanize, while pulse supply is likely to outstrip demand given growth in pulse production from Canada. The food processing industry, while a large market comprising $647 million in Canada alone, also remains saturated with large and powerful incumbents. Finally, pulse consumption is clearly in decline over the decades, based on per capita consumption by region in Exhibit 2, 1961- 2001, although some signs show a revival in the global North over concerns of wheat allergies and antibiotic use in livestock feed.

Recommendations

Given the appropriateness of AGT’s current strategy, Saber River Capital should remain committed to its portfolio investment in AGT, but should remain cautious over the larger trends and company-specific results which show that AGT faces strong tail winds in implementing a shift toward higher value food production. Hence, Saber River Capital should simply hold its existing stock in AGT.

Action Plan (immediate, short/long term)

Saber River Capital, in the immediate present, should hold its AGT stock at its current level. In the short term, they should adjust the level of AGT stock based on the performance of AGT in its new business lines. In the long term, they should exit the market and look for new opportunities in food manufacturing and processing.

References

Beltranena, Eduardo, and Ruurd Zijlstra. “Novel feed grains and pulses in Western Canada.” Adv in Pork Prod 18 (2007): 229-36.

Schneider, Anne VC. “Overview of the market and consumption of puises in Europe.” British Journal of Nutrition88, no. S3 (2002): 243-250.