AppHarvest: New Installations in 2022 Could Boost Stock Price (NASDAQ:APPH)

With two new installations to be completed by AppHarvest (APPH) in 2022, I would expect a significant increase in the company’s production capacity. I also expect management to sign new partnership agreements with distributors outside of the United States. Also, I expect the new e-commerce platform to be successful. Yes, I see risks related to inflation and foreign competition, but the company’s current valuation does not seem justified.

AppHarvest – Two properties will likely be ready in 2022

Founded in 2018, AppHarvest is an applied agricultural technology company with high-tech indoor farms. With cutting-edge technology, artificial intelligence and robotics, I believe the company is poised to revolutionize the way farmers operate and redefine farming:

The farms are designed to grow non-GMO produce, with no or minimal chemical pesticide residues, use mostly rainwater, and produce yields significantly higher than those obtained by traditional agriculture on the same amount of land. Source: 10-k

The company is still in its infancy, investing millions of dollars in capital expenditures. AppHarvest acquired some of its facilities, but it mostly builds its facilities on new sites. According to the most recent annual report, a tomato facility, a green vegetable facility and a green salad facility are under construction. Management noted that two facilities are expected to be completed in 2022, which I believe would accelerate the demand for shares:

As of the date hereof, construction of the Berea Lettuce Facility is approximately 68% complete; the Richmond tomato plant is approximately 65% ​​complete. The two CEA facilities should be fully operational by the end of 2022. Source: 10-k

Major banks like JP Morgan have offered funding to AppHarvest

I believe that the analysis of corporate balance sheets is always necessary. With that, I think AppHarvest has wealthy investors behind the scenes because JP Morgan and Rabobank have given the company significant funding to build new facilities. Banks never offer financing without performing significant due diligence, which makes AppHarvest even more interesting:

In June 2021, AppHarvest secured a $75 million credit facility from Rabo AgriFinance, a leading provider of financial services for agricultural producers and agribusinesses in the United States. Source: 10-k

In September 2021, AppHarvest entered into a $25 million credit facility with JP Morgan based on its third 30-acre high-tech indoor farm under construction in Somerset, Kentucky, which began in June 2021. Source: 10 -k

As of December 31, 2021, the company had reported $151 million in cash, property, plant and equipment worth $343 million, and an asset-liability ratio of 3x. With these numbers, I wouldn’t expect investors to fear AppHarvest’s financial health:

In the last annual report, AppHarvest announced $102 million in new long-term debt and $28 million in current long-term debt. As I said, I think bankers believe in the business model of the company:

Analysts believe in triple-digit sales growth in 2022 and 2023

I looked at other financial analysts’ expectations for the year 2022 and 2023. Their sales numbers couldn’t be better. They expect triple-digit sales growth and EBITDA growth. Investors are well aware that the company will post a negative net result in the near future. With this, it is remarkable that net revenue would decrease in 2023:

The recent guidance given by management is also very practical, and the market seemed to rejoice when it was announced. The company estimates that 2022 sales should be close to $32 million and that 2022 EBITDA could reach -$80 million:

Net sales of $24 million to $32 million vs. consensus of $39.15 million, more than double last year’s net sales, Adj. The EBITDA loss expectation is in the range of $70-80 million, slightly higher than last year’s $69.9 million despite the projected quadrupling of the agricultural network and significant inflation. Source: Alpha Research

My DCF model with the assumption that AppHarvest grows as the global market for AI in agriculture

According to market experts, the global market AI in the agriculture market is expected to grow at a CAGR of 25.2% from 2019 to 2026. In my DCF model, I assumed sales growth of 50% in 2025, sales growth of 225% in 2026, and sales growth of 15 % from 2028 to 2039:

According to the research report, the Global AI in Agriculture Market was estimated at USD 1,002.02 Million in 2020 and is projected to reach USD 3,984.5 Million by 2026. agriculture is expected to grow at a compound annual growth rate of 25.2% from 2019 to 2026. Source: Farmer’s market

In this scenario, I expect AppHarvest to likely sign new partnerships with new marketing and distribution partners. Management is currently working with Mastronardi, but there are other distributors in Europe and Latin America that AppHarvest can talk to:

Mastronardi is our exclusive marketing and distribution partner for all fresh fruits and vegetables grown in Kentucky and West Virginia, including tomatoes, cucumbers, peppers, berries and/or any salad greens that meet certain quality standards. Mastronardi is North America’s leading marketer and distributor of tomatoes, peppers, cucumbers, berries and salad greens. Source: 10-k

I would also expect increased FCF margins from the company’s direct-to-consumer e-commerce platform. I couldn’t get much information on the company’s e-commerce business model, but if management doesn’t have to deal with distributors, FCF margins will likely increase:

Although we are focused on fresh produce, we have also built a direct-to-consumer e-commerce platform which we believe will fuel our direct-to-consumer and value-added produce business, the future development of which depends on our ability obtain financing on acceptable terms. Source: 10-k

I also expect a gradual increase in the EBITDA margin. The company gave guidance for the years 2022 and 2023. Therefore, I only continued the beneficial trend for a few years until it stabilized from 2029. I expect the margin of EBITDA goes from -20% in 2023 to 8% in 2029. I also assuming an effective tax of 22%, a change in the ratio of working capital to sales from 5% to 1%, growth in D&A and growing capital expenditure. Note that I assumed that D&A and capital expenditures will likely be somewhat correlated. The result is an FCF that increases from -200 million dollars in 2023 to almost 199 million dollars in 2039 with an FCF margin close to 6.5%-7.5% from 2032 to 2039:

Now, with a WACC around 5%, which is extremely optimistic given that AppHarvest is a new company, I got a FCF future NPV of -$356 million. However, if we assume an exit multiple of 11.5x, the sum of terminal value and future free cash flow is $1.445 billion. Finally, with a stock count of 95 million, the implied stock price should be close to $15:

If the EBITDA margin does not exceed the EBITDA margin in the agricultural production industry, AppHarvest may be worth $2.5

According to Csimarket, the EBITDA margin in 2021 was close to 4% to 6%. In this scenario, I assumed that AppHarvest would achieve a 5% EBITDA margin in 2028:

Even reporting sales growth of 25% in 2026 and 20% to 10% from 2027 to 2039, the company’s FCF could not justify a stock market position. I assumed capital expenditure close to $50 million per year and working capital/sales between 3% and 1%. This results in a free cash flow margin close to 4% from 2032 to 2039:

If we also include a WACC of 7.5% and an exit multiple of 10.5x, the equity value would equal almost $240 million. The implied stock price would equal $2.5:

Inflation risks and competition from Mexican or foreign manufacturers

AppHarvest’s business model will likely be impacted by food price inflation. Management may also suffer from inflation in the price of building materials, which may impact the cost of developing AppHarvest facilities. As a result, future free cash flow could be less, leading to a lower share price:

The price for the production, sale and distribution of these goods may fluctuate significantly depending on the impact of many factors beyond our control, including international, economic and political trends, transportation disruptions, inflation , global or regional consumption patterns, speculative activities and increased production due to new developments in production and distribution and improved production and distribution methods. In addition, we import almost all of the construction materials used for the construction of CEA facilities. Source: 10-k

AppHarvest will likely compete with farmers in foreign jurisdictions. Even though competitors may not have AppHarvest’s farming technology, their farmers may earn less than in the United States. In sum, competition could harm a company’s revenue growth:

We operate in the highly competitive health food environment. With the rapid increase in vine crop imports, our competition includes large-scale operations in Mexico and, to a lesser extent, the southwestern United States Source: 10-k

Conclusion

AppHarvest expects to complete two installations in 2022, which would significantly increase the company’s production capacity. If management successfully signs more distribution deals and launches a new e-commerce platform, revenue and FCF will likely head north. I think the upside potential for the stock price justifies taking on inflation and competition risks. I am a buyer of AppHarvest shares.