Verde AgriTech Stock: Why Did The Stock Plunge 20% Last Week?

Geöffnete Plastiktüte mit grünem Komplexdüngergranulat auf dunklem Bodenhintergrund. Closeup. Produkt zur Wurzelfütterung von Gemüse, Blumen und Pflanzen. Top-down-Ansicht.

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Investment thesis

I have already written two bullish articles on Verde AgriTech (OTCPK:VNPKF) (TSE: NPK). In the first one, I described the business in detail; the second one was about the updated guidance for 2022. Last week the stock price plunged by 20%, so I will have a close look with you if my bullish thesis is still intact and what exactly happened.

What’s the bullish thesis?

We are in a global fertilizer crisis, partly due to the worldwide gas crisis. More and more European manufacturers have to close down, and US manufacturers can hardly keep up with production. In addition, natural gas prices have also risen in the USA. Therefore, there has been an explosive increase in fertilizer prices.

Verde produces an alternative called KForte, which consists of glauconite and is mined in its mines in Brazil. KForte is also much better for long-term soil quality, especially for microorganisms. Regarding the price of KForte, Verde is using the global price of KCL (potassium chloride) as a guide. Verde already has permits for new mines, and the combination of explosive growth and excellent margins is at the heart of my bullish thesis.

What went wrong last week?

Currently, Verde operates one mine with a capacity of 0.6 tons per year, and a second with an additional capacity of 2.4 tons is under construction. Verde states in a press release that there were unforeseen problems with groundwater during the construction of the roads to this second mine, because they have to build not only the (open) mine but also 22 km of roads and a bridge. The groundwater problems were not at the mine but close to the streets. The result is that the mine output is delayed, and full operation is now expected for Q4 instead of Q3. As we all know, the market hates the unexpected, especially with small growth companies, and reacted with a nearly 20% loss on Friday.

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NPK data by YCharts

Effects on the full-year result

Interestingly, the company did not revise the guidance for the entire year downward but left it at C$0.50. Q3 is now expected to be only C$0.12 instead of C$0.25. But since Q1 and Q2 results were already excellent (together C$0.25) and Q4 is also expected to be very strong, guidance is still C$0.50. This would correspond to a P/E ratio of 11 on the current share price of C$5.7.

Following the lower than expected deliveries from Plant 2 because of logistical issues during Q3 2022, the original 2022 annual Guidance is expected to be achieved thanks to Plant 1’s continued operation at capacity and Plant 2´s successful commissioning and dispatch of Product within the next 4 to 8 weeks. Client´s demand for Products continues to outstrip current delivery capacity. The Company is offering discounts for Q4 2022 and Q1 2023 delivery, in order to maximize Plant 2 output in those seasonally weak months, as well as to generate more market penetration.

What to expect in 2023

The target for 2023 is to sell 2 million tons thanks to the hopefully completed mine (in Q2 2022, they sold 200k tons, which led to C$0.19 EPS). Another third mine is awaiting government approval and would add another 10 million tons of production capacity. Construction would start in 2024. In addition, Verde expects to pay a dividend for the first time next year (minimum C$10 million). With 52M shares outstanding, $10M equals C$0.19 per share, a yield of 3.3% at the current price.

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NPK Shares Outstanding data by YCharts

Risks

I believe the share has excellent prospects, but there are, of course, risks. One is the indirect link to the KCL price. If this price drops sharply, Verde will have to sell its product at a lower price. Another risk is what happened last week: something can always go wrong. Brazil is more politically unstable, more corrupt, and a tropical country where natural disasters occur. Another risk is that the third mine will not be approved, making further growth more difficult.

Conclusion

This article is a bit shorter, so I recommend all new interested people to read also my previous two articles – best in the proper order. What happened is not that bad, and a 20% slump is somewhat exaggerated. I see this as a good buying opportunity. Finally, as a different perspective, the Fastgraph of the share.

Fastgraphs Verde Agritech

Fastgraphs

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