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Wheat and milk producer Don Agro becomes first Russian company to list on SGX

Jeffrey Tan
Jeffrey Tan • 8 min read
Wheat and milk producer Don Agro becomes first Russian company to list on SGX
SINGAPORE (Feb 14): Until about eight years ago, Russian agriculture company Don Agro Inter- national was a distressed asset suffering from poor management and weak corporate governance. The production of wheat – its core crop – was done using outdate
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SINGAPORE (Feb 14): Until about eight years ago, Russian agriculture company Don Agro Inter- national was a distressed asset suffering from poor management and weak corporate governance. The production of wheat – its core crop – was done using outdated farming equipment and grown with insufficient fertilisers. Its dairy cows were also not looked after properly as employee morale was low.

That all changed when the company was acquired in 2012 by its current executive chairman Evgenii Tugolukov and chief executive Marat Devlet-Kildeyew via their investment vehicle Vallerd Investments. The pair previously ran an engineering business that operated in Russia’s power generation industry. They then decided to venture into agriculture as they recognise the potential that could be realised by adoption of new technologies, new processes and new management.

Besides buying new equipment and machinery along with sufficient fertilisers for crop production, they also implemented proper care while providing forage of higher nutrition for the livestocks. They also motivated the em- ployees and promoted the best.

This gradually turned around the company’s performance. Its top and bottom lines as well as margins have grown since then. “It took about two to three years to restructure before we became successful,” Devlet-Kildeyew — who is a Canadian citizen — tells The Edge Singapore in an interview. “It was hard work every day [and] every week — no miracles.”

On Feb 14, Don Agro became the first Russian-based company to list in Singapore on the Catalist board of the Singapore Exchange. This issue was arranged by PrimePartners Corporate Finance. Some 23 million new shares at 22 cents each has been placed to new investors, both individuals and institutions, such as Bordier & Cie (Singapore), Orsett Trading, Aleksei Repik and Timur Avdeenko. raising gross proceeds of $5.1 million. There’s no public offering, however. Post IPO, Tugolukov owns 117.5 million shares in the company or 78.2% stake, while Devlet-Kildeyew owns 7.5 million shares or 5% stake.

At 22 cents a share, Don Agro is valued at 5.2 times its earnings in FY2018 ended Dec 31. This compares to its somewhat similar but not identical peers — Japfa and Mewah International — which traded at 12.5 and 13.7 times earnings based on their respective Feb 11 closing price. Japfa produces poultry, beef, swine and aquaculture products. It also runs a fully-integrated dairy operations, with farms and processing facilities in China and Indonesia. Mewah International, on the other hand, focuses on edible oils, such as palm oil and sunflower oil as well as rice trading and dairy manufacturing.

Devlet-Kildeyev says the decision to list Don Agro outside of Russia was because the company plans to expand sales of its crops to Southeast Asia. Wheat consumption has increased fivefold in the region, he points out. “People are switching their diet to include more bread and croissants. So we are attracted to the positive dynamics of wheat consumption in South- east Asia. It’s an explosive growth,” he says.

And given that Singapore is a reputable financial centre, a listing here should bode well for Don Agro, says Tugolukov. In particular, the company will be better able to leverage his local business ties, since he has grown roots in Singapore and is a permanent resident. Tugolukov was an honorary business representative with Enterprise Singapore, promoting bilateral trade and business relations between Singapore and Russia from 2014 to 2018. “We think to be listed here is the best way to [expand],” he says in the same interview.

Of the gross proceeds of $5.1 million, the bulk of it – some $3.8 million – will be used to cover listing expenses, while $400,000 will be used to acquire arable land bank. A further $400,000 will be used to acquire new equipment and machinery. Yet another $400,000 will be used to explore opportunities in mergers and acquisitions, joint ventures and strategic alliances. The remaining $100,000 will be used for general working capital.

Black Sea wheat

Don Agro’s operations are located in the Rostov region, southwest of Russia, a well-known agriculture region thanks to its soil and precipitation. The company has a controlled land bank of over 50,000 hectares, which is located 200 km away from Rostov-on-Don, a key port city and administrative centre of the region.

About 70% of the company’s revenue comes from wheat, while 10% is derived from sunflower, corn, sorghum, flax and other crops. The remaining 20% is contributed from the production of raw milk.

Devlet-Kildeyev says Don Agro sells its crops to both Russian and international traders, such as CJSC and RZT. CJSC is a subsidiary of Yug Russia Group, a major food producer in Russia, while RZT is a Russian subsidiary of US-listed agribusiness and food company Bunge. Its raw milk, on the other hand, is sold to a single Russian customer, Voronejskijj – a subsidiary of Molvest Group, a major dairy product manufacturer in Russia.

According to Devlet-Kildeyev, wheat produced in the region including Don Agro’s is known as Black Sea wheat and it is highly sought after by traders. This is because the grain typically contains impurities of just 0.1% to 0.3%, which is far below the acceptable standard of 2%, he claims. “So it is of high quality. That is why Black Sea wheat is very popular among traders,” he explains.

It also helps that the cost of wheat production is cheaper in Russia compared to many other countries, thanks to the weak rouble. This makes the prices of Don Agro’s wheat competitive against its rivals.

Devlet-Kildeyev claims that the company’s production of raw milk is of “good quality”. This, he says, is due to the breed of cows that produces milk containing high fat and protein content. The company currently has about 2,000 milking cows, producing 40 tonnes of milk daily, he says.

Still, Don Agro’s financial performance has been choppy in recent years. The company’s revenue fell from $30.9 million in FY2016, to $23.2 million in FY2017, before nudging slightly higher to $24.4 million in FY2018. It recorded revenue of $11.6 million in 1HFY2019 ended June 30, up 48.7%, from $7.8 million in the previous corresponding period.

Similarly, the company’s earnings fell from $4.2 million in FY2016, to $4.1 million in FY2017, before rising to $6.4 million in FY2018. Its earnings more than doubled to $4.3 million in 1HFY2019, from $2.04 million in the previous half-year period.

Artur Nazaryan, chief financial officer of Don Agro, says the uneven results are mainly due to the shift in timing of sales owing to unfavourable weather. He explains that if the harvesting season is late, this will lead to a delay in sales of crops. That is why the company grows a variety of crops to smoothen out the fluctuation, he notes. The milk production business also helps to mitigate this, he adds.

Sanctions, liquidity risks

That aside, geopolitical risks could also threaten Don Agro’s financial performance. As the company’s operations are entirely based in Russia, and is engaged in business transactions with many Russian companies, some of these entities could be subject to various trade and economic sanctions. Should any of these entities face certain restrictions or penalties, the consequence could be negative on the company’s operations.

Notably, Don Agro’s principal bankers — state-owned RSHB and Sberbank — are subject to certain sanctions imposed by the US, EU, Australia and NSDC Sanctions. The NSDC Sanctions refer to the Ukrainian National Security and Defense Council’s Special Economic and Other Restrictive Measures (Sanctions). Its major customer CJSC is also subject to the NSDC Sanctions, while one of its major suppliers — RN-Rostovnefteprodukt JSC — may be subject to certain sanctions imposed by the US, EU and Australia.

Crucially, Don Agro itself is not under any form of sanction. According to Hogan Lovells, the legal adviser to the company on international sanctions laws, the company’s business dealings with these sanctioned parties do not violate any applicable law or regulation.

Tugolukov admits that a significant amount of due diligence was made on Don Agro in relation to sanction risks. But he stresses that no individuals or entities under the company are subject to any sanction. “We don’t see any prospect for that because we are just business people. We are doing international business. We are not connected to any individuals under the sanctions. We never experienced any problems or effects from these sanctions,” he says. Assuming that RSHB and Sberbank face certain restrictions or penalties owing to the sanctions, he adds that the company can engage other banks that don’t face any sanction. As of June 30, 2019, the company has cash and bank balances of $1.8 million.

Interestingly, Don Agro has a history of breaching its financial obligations. In 2017, the company breached financial covenants worth $10.3 million. However, the lenders have not exercised their right to demand immediate repayment, the company says. The company also believes that the probability for such a request is “remote” as it continues to service the loans on a timely basis.

In 2018, the company also breached a number of financial covenants amounting to $6.9 million. Of this, $5.9 million are repayable in 2019 and $998,000 are repayable in 2020 to 2021. However, the company had received a letter from the bank counterparty acknowledging that it had no loan payment defaults due to the breach of the loan covenants.

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