Migdal analysts offer advice to Makhteshim Agan

Makhteshim Agan Industries should change its business model if it wants to fulfill its potential, writes analyst Amir Adar, of the sell-side research department at Migdal Capital Markets, in a recent review of Israels largest agrochemical company. Adar gave the companys share a Hold recommendation, with a 12-month target price of NIS 18.5, just 4% above its current market price.

Adar also advises Makhteshim Agan shareholders to accept the purchase offer issued by Koor Industries. Even though the purchase offer of NIS 18 is only slightly more than the shares current price, Adar says unpleasant surprises could still be in store for shareholders, as Makhteshim Agan is expected to report a weak third quarter.

"We do not consider it a trivial matter that for the past five years, year after year, Makhteshim Agan has had a weak second half that was accompanied by a profit warning in three of those five years," writes Adar, who goes on to cite the companys various explanations for its weak financial results.

"One year the weather was blamed, another the farmers economic situation, and another year it was the [foreign currency] exchange rate," he writes, opining that these excuses conceal the companys real problem - that its operations are threatened by competition on the one hand, and genetic engineering on the other.

Adar believes Makhteshim Agans latest profit warning is another piece of disturbing proof that the companys business model is in urgent need of an overhaul.
Agrochemicals currently account for 92% of Makhteshim Agans sales, with seeds and non-crop products accounting for the rest. Among the agrochemicals, herbicides - which have relatively low profit margins - generate 58% of Makhteshim Agans sales, but account for just 47% of the agrochemical market. Fungicides, on the other hand, have higher profit margins, and also account for 18% of Makhteshim Agans sales, while constituting 26% of worldwide agrochemical sales. Adar suggests improving the mixture of agrochemicals, alongside the establishment of strong, stable supplementary operations. These modifications, says Adar, will stop the companys dependency on two consecutive good farming seasons to achieve significant cash flow.