UBS kept its recommendation for Makhteshim Agan Industries Ltd. (TASE: MAIN) unchanged at "Neutral" following the generic agrochemical manufacturer's acquisition of Albaugh Inc. for $1.28 billion. UBS also reiterated its 12-month target price of NIS 19.
Albaugh is a leading US producer of glyphosate and other generic herbicides, two of Makhteshim's core businesses. The company's South American sales in Brazil, Argentina, and Chile complement Makhteshim's business in Brazil, Colombia and Ecuador.
Albaugh also has six plants in the US, Brazil, Mexico, and Argentina, and a joint venture in China.
UBS analyst Roni Biron says that Albaugh gives Makhteshim a significant presence in North America and South America, low cost production sites, efficient supply chain, and access to large growers in the US Midwest. "By leveraging this infrastructure, Makhteshim has the potential to significantly enhance its positioning in the Americas while better optimizing its global supply chain," he concludes.
Biron notes that Makhteshim believes that Albaugh will begin to contribute to Makhteshim's non-GAAP net profit within a year. He says that the company's gross margin will slip as a result of the acquisition, and that its earnings before interest, taxes, depreciation and amortization (EBITDA) will not change for the first few years. However, "we do think the transaction places Makhteshim in a better position to optimize its global supply chain in the mid-long term."
Biran concludes that while the price tag appears to be on par with current industry valuations, it addresses two important challenges for Makhteshim: the potential to significantly enhance its competitive positioning in the Americas, and more flexibility in optimizing its global supply chain. "If executed properly, Makhteshim’s superior positioning should entail a premium over its generic peers."
Makhteshim's share price fell 2.8% by midday today to NIS 13.70, erasing yesterday's gain that followed the announcement of the acquisition.
Published by Globes [online], Israel business news - www.globes-online.com - on June 29, 2010
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