Industrial Milk Company: farming in Ukraine

Coincidentally, Black Earth Farming isn’t the only farming company in the Russia region that hit my radar this month. Before stumbling on that merger idea I was already looking at Industrial Milk Company. Despite its name, the company is mainly focused on raising crops. Its assets are located at the other side of the border, in Ukraine, and it has roughly the same size as Black Earth Farming while focusing on the same mix of crops. So I think the transaction is a nice data point that can act a bit as a sanity check on our valuation. I started looking at Industrial Milk Company based on a tip from a reader, who described it as having a normalized P/E ratio of 2x. While investing in Ukraine isn’t without risk, that’s certainly cheap enough to arouse my interest. Before we continue discussing the company in more detail, some quick statistics first:

Ticker: IMC:WSE
Latest price: 9.86PLN ($2.48)
Market cap: US$77.5 million
P/E: 7.15
P/B: 1.10
EV/EBIT: 3.22

Based on these statistics the company doesn’t immediately looks like a screaming buy, but there are a lot of moving parts that impact the income and balance sheet statements. Industrial Milk Company has the Ukrainian Hryvnia as functional currency while using the US dollar as presentation currency, and as a result it has been incurring large FX losses the past years. Since its assets are mainly land and machinery while it sells most of its production internationally these losses are presumably mostly accounting issues, not real economic losses.

In addition, the company recognized a $16 million loss in the trailing twelve months because it loaned money from the IFC that came with a warrant agreement that allowed IFC to claim $21 million if it would not exercise the warrants. With the warrants having a strike at $6.45/share while the stock is currently trading at $2.48 they obviously went for the cash payment. Bit weird accounting wise in my opinion, but certainly shouldn’t be a recurring issue. Because of this additional liability net debt stayed stable the past nine months even though the company generated a good amount of cash flow:

Normalizing earnings by ignoring FX losses and adding back the “Loss on recognition of additional return on financial liability” is tempting to do (the company does this, see for example page 5 here), but based on the amount of free cash flow the company is generating I think that is a too optimistic approach. To be honest, I have a bit of trouble figuring out where the earnings disappear. Since the company is valuing their biological assets at fair value there is a large non-cash component to earnings, and part of that disappears as a non-cash element of “cost of sales”, but inventories, biological assets and receivables aren’t really growing. Guess that must be because of the FX losses?

So instead of using earnings, I’m inclined to look at free cash flow as the best way to value the company. But that’s also a bit tricky, since cash generated from operations hasn’t been very stable historically. The past three years have been solid, but before then results have been more mixed.

As a starting point I will take TTM cash from operations of $36.9 million, add back interest expense of $13.1 million and subtract depreciation of $8.5 million. Current capex is below depreciation, but I have no reason to believe that that is sustainable. It might even be too low if the book value of the PP&E is artificially low due to the FX losses. This gives a total cash flow that is available to the whole firm of $41.5 million. Now the big question is what kind of return should investors require here. Industrial Milk Company is not some save western company, and that is reflected in the interest rates that the company pays on its USD loans that are between 10 and 12%. Add an equity risk premium of something like 6%, and we probably should require a return of roughly 17.5% on unlevered equity. That would mean that the whole company is worth $237 million. Subtract $91.9 million in net debt and we arrive at an equity value of $145.2 million: implying that there is roughly 85% upside from the current market price. Not bad, but also not as high as you would have hoped if the starting promise is a 2x P/E ratio.

We can use the Black Earth Farming as a bit of a sanity check of what the company should be worth as well. Some statistics side by side, and the implied upside:

The financial statements of IMC might be difficult, but when you buy a farm in the end not a lot of variables matter. How much land you buy (as measured by surface area) and how many crops grow every year on it (measured in tons and/or dollar value) is basically everything you need to know. And based on this I think my simplistic free cash flow model is pointing in roughly the right direction. Just based on hectares the upside potential isn’t that big, but IMC is a lot more productive based on sales volume and total revenue. With 1.5x more equipment, 1.5x times higher production volumes and 1.4x times higher revenue I would say that IMC in an optimistic valuation is maybe roughly worth 50% more than Black Earth farming: so $300 million. After accounting for the debt that would mean an upside potential of 168%.


Industrial Milk Company is for sure not expensive, but at the same time I’m not yet totally convinced that it is a great buy. If you take a leveraged company and value it based on the acquisition price of a comparable almost anything will look great. Based on free cash flow it is still a decent deal, but I’m worried that basing my valuation on just the past twelve months is also too optimistic. Historically, the conversion of operating earnings to cash hasn’t been great. So I’m still a bit on the fence if I should buy it or not. The upside is there, but it isn’t insanely big and at the same time I have a bit of troubles fully grasping how the accounting works.

What do you think?


Author has no position at the moment

23 thoughts on “Industrial Milk Company: farming in Ukraine

  1. Quickbeam

    You can just buy japanese companies at these valuations. Have a look at Fujii Sangyo, Fujita Engineering. Both trading at large discounts to book and close to negative evs.. with growing earnings and consistent buybacks. Just no english annuals.

    1. Alpha Vulture Post author

      I like Japanese companies, but just because there is cheap stuff in Japan doesn’t mean I shouldn’t try looking in different spots :). But will take a look at those two names. I recently bought Joban Kaihatsu, you might like it as well.

      1. Adrian

        How do you go about doing research if the financials aren’t in english? Screening and sorting must be difficult.

        1. Alpha Vulture Post author

          Usually my research is superficial, just buying a basket of things that are cheap statistically. Sometimes I translate an annual report with google translate, but usually too lazy for that. Just trusting that buying stuff with for example a 6x P/E ratio and most of its market cap in cash will work out in the long run.

          1. Rukawa

            Use this:

            It provides Japanese financials in english. The other alternative is XBRL. I have a project going where I am attempting this. Theoreticcally if you have programming skills it should be possible to translate most financial in most countries into English.

  2. Bram de Haas

    I own some Trigon Agri. Ukrainian farm land and some dairy farm (also hold some Russian land). Converted lots of debt into equity due to distress. One minor thing to note is that in Ukraine you currently don’t really “own” land I think. In Russia there seems to be an actual state of ownership but sometimes companies hold acres they still need to “convert” to true ownership. The acres are still incredibly cheap compared to global counterparts.

      1. Quick

        I completely agree, but I have in the past underestimated geographical risk. Force Majeure can be a real issue. In Japan this risk is just so much lower. Ill have a closer look at Joban


      Bingo. If you are comparing BEF to IMC you need to factor in that BEF owns its land which is the only reason it got sold in the first place. 250 000 acres in ownership is worth $100 million at a bare minimum. The Ukrainians have done a masterful job of persuading the “market” ( the few investors still paying attention) that ownership doesn’t matter. Maybe that’s why so few people are still paying attention.

  3. George

    Hey I’m new to reading your blog and I’ve liked what I read so far.

    I think as far as this opportunity, the risk/reward just isn’t there. It’s a cigar butt and you’re hoping to make 2x your money say in 3 yrs for a 25% IRR, but with so much risk. The IV of the company is hard to value, it’s tough to say if the value of the business is growing over time. This seems like a commodity business where buyers have leverage over small producers. Even in the US farmers are pressed to buy new technology to meet the standards of food producers so capex requirements are high. The US fertilizer companies are somewhat in distress and trade at similar levels (and they have the natural advantage of low cost inputs, US nat gas). The currency isn’t very stable and it’s got a lot of debt. I think your risk of permanent impairment of capital on this one is pretty high. I’d probably want the upside to be at least a 3-4x to dig deeper.

    1. Alpha Vulture Post author

      I think seeing this as a 25% IRR kind of upside potential is too pessimistic. Remember that I used a 17.5% discount rate for the “fair value” estimate. So you will get this underlying return plus the closing of the discount. So it would be more like a 40% IRR and 150% upside if you take a 3 year time horizon.

      I’m not convinced yet myself if that’s enough, but it’s tempting…

      1. George Zhang

        Ah sorry, my mistake.

        Still, the I’d worry about the capex assumptions and the nature of the DCF like you mentioned in other comments.

  4. Thijs

    Hi, I see you’re using unlevered cost of equity on FCFF. Did you intend that, just to be conservative? (I could understand that) Because in theory you should use WACC on FCFF and that would be lower than cost of equity.

    I personally hate DCF’s by the way.. like Curtis Jensen from 3rd Avenue once said: “DCF is sort of like the Hubble Telescope – you turn it a fraction of an inch and you’re in a different galaxy.”

    1. Alpha Vulture Post author

      Yeah, I know. It’s a bit sloppy. Calling it a DCF is also a bit of a stretch, since it doesn’t really model cash flows: just puts a multiple on current cash flow. But maybe you can convince me that using a 17.5% WACC is way to conservative if debt is yielding 10/12%? Maybe taking FCFE and discounting that by 17.5% is more reasonable.

      And yes, I’m also not a fan. Although in this case you don’t really have that problem. Usually the problem with DCF models is that most value is far in the future and very sensitive to changes in discount or growth rates. With a super high discount almost all value is in the next few years, so less sensitive to both changes in growth rate and small changes in discount rate.

      1. Lars

        Technically when you use a multiple you are also putting most of the value far in the future… use 8x or 12x? apply it to this year or next year figures? the range becomes pretty huge.

        1. Alpha Vulture Post author

          No, the bigger the multiple the more value comes from the future. A super low multiple like 2/3/4x means almost all value is allocated to the next few years while a 50x multiple would mean that most value is a decade away.

  5. Imran

    To help with the decision it is helpful to look at what they have done with cashflow historically ie are they paying dividends?


    Had the two companies in my radar 6 mo ago, after Value&Opportunity made thecase for Sapec…both IMC and BlackFarming appeared as peers under FT’s profile for Sapec. Now it’s too late for me…
    I have a little gem in Canada that I keep for my own.


    Btw, I thought your analyses were much more sophisticated… I see noone does it like Value&Opportunity! 😉


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