AppHarvest: New Facilities In 2022 Could Make Stock Price Run (NASDAQ:APPH)

With two new facilities to be completed by AppHarvest (APPH) in 2022, I would be expecting a significant increase in the company’s production capacity. I also expect management to sign new partnership agreements with distributors outside the United States. In addition, I expect that the new e-commerce platform will likely be successful. Yes, I see risks from inflation and foreign competition, but the current valuation of the company 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 that the company is about to revolutionize the way farmers operate, and define agriculture again:

Farms are designed to grow non-GMO produce, free of or with minimal chemical pesticide residues, use primarily rainwater, and produce significantly higher yields than those yields achieved by traditional agriculture on the same amount of land. Source: 10-k

The company is still at an early stage investing millions of dollars in capital expenditures. AppHarvest did acquire some of its facilities, but it is mainly building its facilities at new locations. According to the most recent annual report, a tomato facility, a greens facility, and a salad greens facility are under construction. Management noted that two facilities are expected to be completed in 2022, which would, in my opinion, accelerate the demand for the shares:

As of the date hereof, construction on the Berea salad greens facility is approximately 68% complete; the Richmond tomato facility is approximately 65% complete. Both CEA facilities are expected to be fully operational by the end of 2022. Source: 10-k

Big Banks Like JP Morgan Offered Financing To AppHarvest

I do believe that analyzing the balance sheet of companies is always necessary. With that, I think that AppHarvest counts with rich investors behind the scenes because JP Morgan and Rabobank gave the company a significant amount of financing to build new facilities. Banks never offer financing without executing significant due diligence, which makes AppHarvest even more interesting:

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

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

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

In the last annual report, AppHarvest reported new long-term debt of $102 million, and current portion of long-term debt of $28 million. As said, I believe that bankers do believe in the company’s business model:

Analysts Do Believe In Triple Digit Sales Growth In 2022 And 2023

I consulted the expectations of other financial analysts for the year 2022 and 2023. Their sales figures couldn’t be better. They are expecting triple-digit sales growth and growing EBITDA. Investors know well that the company will deliver negative net income in the near future. With that, it is remarkable that net income would diminish in 2023:

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

Net sales of $24 to $32M vs. consensus of $39.15M, more than double the net sales from last year, Adj. EBITDA loss expectation is in the range of $70 to $80M, modestly higher than the $69.9M last year despite the expected quadrupling of the farm network and significant inflation. Source: Seeking Alpha

My DCF Model With The Assumption That AppHarvest Grows Like The Global AI In Agriculture Market

According to market experts, the global AI in Agriculture Market is expected to grow at a CAGR of 25.2% from 2019 to 2026. Under my DCF model, I assumed 50% sales growth in 2025, 225% sales growth in 2026, and 15% sales growth 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 expected to reach USD 3,984.5 Million by 2026. The global AI in Agriculture Market is expected to grow at a compound annual growth rate of 25.2% from 2019 to 2026. Source: Agriculture Market

Under this case scenario, I expect that AppHarvest will 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 may 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 all salad greens that meet certain quality standards. Mastronardi is the leading marketer and distributor in North America of tomatoes, peppers, cucumbers, berries, and salad greens. Source: 10-k

I would also expect an increase in FCF margins thanks to the company’s direct-to-consumer e-commerce platform. I couldn’t obtain a lot of information about company’s e-commerce business model, but if management does not have to deal with distributors, FCF margins will likely increase:

While our focus is on fresh produce, we have also built a direct-to-consumer e-commerce platform that we expect to power our direct to consumer and value added products business, the future development of which is contingent upon our ability to secure additional financing on acceptable terms. Source: 10-k

I would also expect a gradual increase in the EBITDA margin. The company gave some guidance about the year 2022 and 2023. Hence, I only continued the beneficial trend for a few years until stabilization from 2029. I expect the EBITDA margin to grow from -20% in 2023 to 8% in 2029. I also assumed an effective tax of 22%, change in working capital over sales ratio of 5% to 1%, growing D&A, and growing capital expenditures. Note that I assumed that D&A and capital expenditures will likely be somewhat correlated. The result is a FCF that grows from -$200 million in 2023 to close to $199 million in 2039 with a 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 obtained a NPV of future FCF of -$356 million. However, if we assume an exit multiple of 11.5x, the sum of the terminal value and the future free cash flow stands at $1.445 billion. Finally, with a share count of 95 million, the implied share price should be close to $15:

If The EBITDA Margin Does Not Exceed The EBITDA Margin In The Agriculture Production Industry, AppHarvest May Be Worth $2.5

According to Csimarket, the EBITDA margin in 2021 was close to 4%-6%. Under this case scenario, I assumed that AppHarvest will reach an EBITDA margin of 5% 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 position in the stock. I assumed capital expenditures close to $50 million per year, and working capital/sales between 3% to 1%. The result is 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 be equal to almost $240 million. The implied share price would be equal to $2.5:

Inflation Risks And Competition From Mexican Or Foreign Manufacturers

AppHarvest’s business model will likely be impacted by inflation in the price of food. Management may also suffer from inflation in the price of construction materials, which may impact the development cost of AppHarvest’s facilities. As a result, future free cash flow may be less significant, which would lead to a decline in the stock price:

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

AppHarvest will likely compete with farmers from foreign jurisdictions. Even though competitors may not own AppHarvest’s agriculture technology, their farmers may earn less than that in the United States. In sum, competition could damage the company’s revenue growth:

We operate in the highly competitive natural foods environment. With the importing of vine crops rapidly increasing, our competition includes large-scale operations in Mexico and to a lesser extent the southwestern U.S. Source: 10-k

Conclusion

AppHarvest expects to complete two facilities in 2022, which would significantly increase the company’s production capacity. If management successfully signs more distribution contracts, and launches a new e-commerce platform, both revenue and FCF will likely trend north. I believe that the upside potential in the share price justifies assuming inflation risks and competition risk. I am a buyer of AppHarvest shares.