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AVGR - Avangardco


matjone
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An interesting company, but I would add two other risks...

 

1). Bad publicity

 

2). Environmental problems.  There have been several exposes produced showing truly shocking conditions...

 

Of course, the future may be different than the past.

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I'd be curious how the conditions at avangardco compare to egg plants here.  The conditions chickens are raised in in the U.S are pretty awfult.  Each hen is contained in about an 8 inch square.  There is a funny quote in avangardco's annual report where they state that caging the chickens is actually more humane because they are protected from parasites and harsh temperatures.  I doubt the chickens would agree with that.

 

I noticed his sister became CEO after being out of college a couple years.  I am sure she is very qualified.

 

I haven't bought any of this company.  They look cheap but I wonder about Mr. Bakhmatyuk and about investing in Ukraine/Russia in general.

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I wrote about them here today: http://www.oddballstocks.com/2014/03/calling-all-risk-takers-ukrainian.html

 

The company is extremely cheap, a very depressed valuation.  I think it's at the point where if the company survives and continues business going forward this is a great buy, if not then it's a total loss.

 

I've been thinking of building a small Russian/Ukrainian basket.  Any ideas on what to include?  I'm thinking about stocks at steep discounts to BV and earnings that can weather a storm.  Also most business domestic would be nice.

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I wrote about them here today: http://www.oddballstocks.com/2014/03/calling-all-risk-takers-ukrainian.html

 

The company is extremely cheap, a very depressed valuation.  I think it's at the point where if the company survives and continues business going forward this is a great buy, if not then it's a total loss.

 

I've been thinking of building a small Russian/Ukrainian basket.  Any ideas on what to include?  I'm thinking about stocks at steep discounts to BV and earnings that can weather a storm.  Also most business domestic would be nice.

 

I imagine that long dated call options on a Russian ETF, like RSX, will allow you to capture most of the upside without much work. Normally, my view would be that it would pay to do the due diligence, but given the nationalization risk, I think it's actually better to be much more diversified (which the ETF allows you to do most efficiently).

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Another write up on them with interesting comments

 

http://investingsidekick.com/weekend-stock-pick-avangardco/

 

I own some shares, I contacted them a few days ago and asked them what was happening with the situation over there and they said none of their operations had been affected and all running as normal. If Ukraine gets better ties with the EU this will be great for AVGR as it will be easier for them to export presumably which they have been looking to do for a while.

 

I do worry a bit sometimes about the 77% owner though

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  • 2 weeks later...

Thanks for that info, Worlds.  I do think that Avangardco and Bakhmatyuk have a lot of undesirable characteristics but I do not think it is a fraud.

 

Based on what I've seen on the internet, my concern is that they could see reduced profitability as a result of a few different factors, including:

 

A. being forced to comply with environmental and animal treatment regulations which they are currently flouting.

B. an increase in the tax rate.

C. increased competition.  I don't think an egg producer should normally earn returns this high.  Comparing them to cal maine on the basis of enterprise values, number of hens, and number of eggs sold Avangardco isn't that cheap.

D. increased feed costs.  Some are saying their feed costs are unnaturally low due to unfair lease agreements with small landowners in Ukraine.

 

Bakhmatyuk is another risk and is probably the main one I am worried about.  He has apparently backed out of a chicken farming operation he had planned in North Carolina and is now being sued over that.  He has also been accused of bribing officials and journalists, and his past makes me a little uneasy.  When someone rises as fast as he did in a state owned company in an environment like the Ukraine it makes you wonder what he did to make his money.  I don't get the impression that he is using the capital markets to raise money and then run off with it,  but if he is I have to admit that there would be no one to complain to, and nothing would probably happen to him

 

What I like about the company is the cheapness, growth, and the business they are in.  I figure people are going to keep eating eggs.  At 3x earnings and half book I figured it was worth the gamble, but I didn't put a lot in it.

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  • 4 weeks later...

This thing is causing a lot of pain every time I watch the news.  I am thinking people are pricing in a large war where production facilities are destroyed, or maybe expropriated, or fraud.  Who knows, maybe they are right?  I am not going to try to become an expert on foreign affairs.  AVGR has a 40% earnings yield right now so I plan to hold for a few years and see what happens.

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http://www.worldpoultry.net/Layers/Eggs/2014/7/Ukraine-Avangardco-feedmill-captured-by-rebels-1564866W/

 

That sounds like good news for Avangardco's shareholder's, Worlds.  This may be the last time I buy into a politically unstable situation.

 

Let's not be too hasty here I think some analysis is required first. That article sounds a bit more dire than their press release which was on the 18th. http://avangard.co.ua/files/news/AVGR_Feed_Mill_is__Under_Armed_Occupation__18_07_2014_ENG_Final_RNS%281%29.pdf

 

Note the fact that it supplies 11% of the total feedstock for the company and in particular supplies feedstock to Kharkiv, Donetsk and Luhansk Oblasts. While this is a significant issue the company is taking steps to prevent this from stopping business. I emailed their IR about this situation. They gave a rather detailed response that I am quite happy with to say the least, so far they provide a lot more info than most would expect.

 

Since the beginning of 2014, after the conflict escalation, Vyhlehirskyi feed mill supplied with fodder only nearby poultry farms in the Donetsk and Lugansk regions. Farms in the Kharkiv region purchased feed from the third parties. After the Vyhlehirskyi KHP was captured, the fodder to the enterprises in the Donetsk and Lugansk regions was delivered from Volnovakha feed mill. The capacity of Volnovakha feed mill is enough to cover all needs in fodder.

 

So since they are buying feed from a third party (I'm guessing at highly inflated prices) I'm guessing earnings have been adversely affected by this. They also said that logistical operations take place in ATO controlled areas, so the risk due to transportation is reduced.

 

It is important to note that since the beginning of 2014 the Company decided not to renew the livestock on Donbas (Donetsk and Luhansk regions) till the stabilization of the situation, i.e. now the farms are loaded by the flock that has already been or was planted at the beginning of the year. Poultry farms cover the needs in products within the region in full.

 

So it seems until the situation calms down they aren't going to replace the chickens after the current batch dies off. If the situation doesn't stabilize at some undetermined point (I don't know what their chicken lifecycle is to determine this) 

 

Now let's look at the location of the plant in regards to ATO/Separatist positions. The frontlines in this conflict are particularly unclear with various contradictory reports from ATO and Separatists. I started a discussion regarding this with two people on reddit who have been making maps of the conflict for quite a while. Novoluganskoe is a small village near Svitlodarsk, however they are both encapsulated by ATO held territory. The situation is however very fluid and it is not entirely clear how strongly ATO controls the area south-east of Svitlodarsk. Here is the most recent map https://twitter.com/FPWatcher. I emailed IR on August 1st so that is the latest info I've got; the situation may have changed since them however.

 

Looking at the overall conflict, it would appear I was incorrect in my initial speculation, Russia has stepped up support for the rebels, and the Ukranian airforce has been decimated by Strelas and Iglas. Also due to the ATOs lack of logistical capability the Ukrainian forces in the  "Southern Cauldron" have fled into Russia. The separatists now have access to major border crossings and areas where it will be easier for volunteers and weaponry to come in from Russia. Furthermore the corridor the Ukrainian had pushed through between Donetsk and Luhansk seems to have collapsed and it is entirely unclear who controls what territory in that area. The MH17 crash site is in this corridor as well further complicating things. My research indicates that Strelkov is apparently purchasing fall/winter clothing for his troops, which is a very bad sign.

 

ATO still has the momentum here, but if they are unable or unwilling to push through that corridor then this conflict risks becoming very protracted which would be dangerous for the populace in the winter. We will likely see what happens to Novoluganskoe and the factory sometime soon, the separatists there can not hold out for that long. Even if some fighting occurs there it won't be a hundred percent loss of the facility. Even if we assume it is a worst case scenario of a complete loss then book value will take a hit, but Avangardco can keep feeding their hens by purchasing grain from elsewhere.

 

Also their website appears to be down so the link up there probably won't work.

 

Whoa, since when do we have to be military and political analysts to invest in stocks... You are doing a fine job investigating but to me stock investing should be one foot hurdles this one does not seem like it. Let me ask you a question, would you buy AVGR today or are you doing all this analysis to try to recoup lost money?

 

BeerBaron

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What is the status of the dividend?  Is it delayed, cancelled, etc.?

 

They said they would have a payout ratio of 25% of profits, so in theory as long as they make a profit they can stick to their promise. But articles suggest the takenover property will be destroyed which means they'll need cash to rebuild it when (if) they get it back.

 

I wouldn't count on a dividend, but at these prices I dont think a cancelled dividend will have much effect on the SP.

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Trading update has been released, doesn't look too bad

 

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=12045373

 

Shell egg production increase and price increases, though slightly lower sales to customers. And they are now getting feed from third parties for the disrupted facilities without a problem, don't know how much its costing them though

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Before registering in corner of berkshire, there was an english version of this video on youtube, which seems to have been retired.

 

The video is supposed to show farms too close to villages, soil spoiled and tons of dead chickens buried in the ground.

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Yeah I have seen that. This company has a lot to be ashamed of, but I'm not sure that it is a fraud.  It is true that they are making more money than Cal-Maine on a smaller operation.  My thinking when I bought it was that they really were making this money, but they weren't making it honestly.  There are allegations that Ukrainian ag companies have lower expenses than they should because they are squeezing the farmers with unfair contracts.  Also, if I remember right cal-maine does not produce all the eggs they sell - they actually buy a fairly significant amount from third parties and they make a lower margin on them which could account for part of the difference in margin.  I could be recalling some of this wrong because it's been a while since I was looking into Avangardco and my memory sucks.

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  • 3 weeks later...

"Dividend declaration:

The Board of Directors of AVANGARDCO IPL has declared the total dividend payment of US$29.5

mln, representing US$4.625 per ordinary share (1 share = 10 GDRs). The dividend payment will be

made by 31 December 2014 to shareholders of record as of 14 October 2014.

As a result of the challenging economic environment in Ukraine AVANGARDCO IPL is focused on

maintaining a cautious fiscal policy and adequate foreign currency reserves in order to meet all its

outstanding financial obligations. The Board of Directors has prudently set the dividend payout ratio at

12.5% of net income for the financial year ended 31 December 2013, and below the target payout

ratio of 25%. The Company is committed to serving the interests of all investors.

In addition, the Сompany announces its intention to buy back its Eurobonds in the market. The timing

and the size of the buyback will be disclosed separately at the appropriate time. "

 

Very smart move.

Eurobonds v. v. v. v. cheap

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