BIOX - Bioceres Crop Solutions: Worrying Amounts Of Share Dilution Here

2023-06-17 00:05:51 ET

Summary

• Bioceres Crop Solutions Corp is an agricultural biotechnology company focusing on genetically modified seeds, crop protection products, and other agricultural technologies.
• Despite revenue growth and potential market opportunities in Brazil, the company's share dilution and negative free cash flow contribute to a sell rating.
• Investors should consider more established companies in the sector with strong margins and cash flows, such as The Mosaic Company.

Investment Summary

Bioceres Crop Solutions Corp (BIOX), headquartered in Rosario, Argentina, is an agricultural biotechnology company. Their primary emphasis is on the development and sale of genetically modified seeds, crop protection products, and other agricultural technologies.

This isn't the first time I am writing about the company. In my last article a few months back, I also covered them and rated them a sell because of a lack of consistency when other companies in the same field were growing. This seems to have improved as revenues grew 33% YoY in the last quarter, but what is extremely worrisome and contributes to my continued sell rating is the share dilution happening. The company went from 41 million outstanding shares in Q1 of 2022 to 62 million in Q1 2023. That sort of dilution doesn't constitute a buy case in my book and instead places a lot of risk on the investor and BIOX will be rated a sell as a result of this.

Brazil Market Opportunity

A recent development with the company is the approval of a further 3.2 M hectares of cultivation of wheat. This addition presents a strong opportunity for BIOX which they can tap into.

BIOX has already made important partnerships with companies in the industry that will be strong customers. Partnering with Embrapa will help ensure there are viable varieties that can be planted in the region. With HB4 wheat the potential is there for double cropping where they can rotate wheat with a summer legume, which should help bring up margins for the farmers and increase agricultural profitability. The developments are necessary seeing as the regions are quite limited by the water availability there. So with BIOX establishing a variety, they will be a major beneficiary in the long run in my opinion. BIOX expects the HB4 technology development to help yield an additional $15-$20 million additional EBITDA by FY2024. Which would be an increase of about 28% if they achieve the upper end of that guidance. I think this sort of growth makes the valuation a little more fair. An FWD p/e of 28x for a company growing the EBTIDA that fast seems reasonable, but it still doesn't constitute a buy case, unfortunately. The additional EBITDA will need to battle debt seeing as the FCF is still negative.

Risks

The fertilizer industry is not immune to the risks posed by climate change. Fluctuating weather patterns and extreme events can impact crop yields, leading to uncertain fertilizer demand. BIOX, for instance, has experienced the effects of severe droughts in Argentina. This has led to BIOX needing to innovate and develop technology like the HB4 wheat in order to stay ahead of the competition and make sure they still have a market that they can serve.

Besides that one notable concern is the steady increase in long-term debt, coupled with limited net margin growth. Additionally, the company has experienced a decline in cash flows, increasing the likelihood of share dilution to raise capital, just like we saw in the first quarter of the year, where shares outstanding rose a worrying 45% YoY. This sort of dilution hurts an investment a notable amount and I am reiterating that the dilution right now is enough to trump any investment case for the company in my opinion.

Financials

Looking at the financials for BIOX I think they have done some good work growing their assets so far. The cash position has seen a nearly doubling in its amount on a year-over-year basis, sitting at $70 million right now, up from $41 million.

But with that said BIOX has also quite quickly increased their inventory on a yearly basis. This is slightly worrisome as it could mean they aren't getting their products out quickly enough and instead of keeping a good rotation they are rather building up stock which then isn't translating into growing revenues.

Taking a look at the liabilities though the company still has a fair bit of long-term debts, which now sit at $142 million. The cash position can make a pretty big impact on the debts but with no positive cash flows, they remain under a lot of pressure here in my view. The lack of positive cash flows will even make it difficult to battle current liabilities, where they have $100 million in borrowings to pay down. This I think showcases the continued risks that BIOX will continue to dilute shares, as they have done over the last several years.

All in all, I find the balance sheet to highlight some of the cracks in the business, like the current liabilities being higher than the cash position which greatly supports the case for continued dilution. In order for there to be improvements here BIOX needs to raise margins and ensure positive cash flows. Without that, the risk-reward/ratio here is simply too high.

Valuation & Wrap Up

Right now BIOX sits at an FWD p/e of around 28, much thanks to the EBITDA right expected with the HB4 program in Brazil expected to generate between $15 - $20 million additional EBITDA by FY2024. That would constitute an increase of around 28% which makes BIOX a growing company right now. Where the bear case could turn into a bull case instead would be if BIOX is able to raise capital through other ventures than dilution. That would help stabilize the share price in my opinion and the downside would be limited instead. A surprise with their estimated EBITDA for the HB4 technology would also be a driving force for the share price climbing.

Where I see the glaring risk however that trumps the investment case is the dilution of shares the company is performing. I don't see it slowing down significantly either as the FCF is still negative and the current liabilities the company has outweighs the cash at hand. This all makes me rate the company a sell, just like in my last article . Investors are better off looking at more established companies in the sector, like The Mosaic Company (MOS) for example, which already have strong margins and cash flows and rather than diluting shares are actually buying them back at a strong rate.

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