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The German company creating solutions for farmers facing drought challenges

The German company creating solutions for farmers facing drought challenges

In our previous article on this theme, we discussed the impact of extreme weather conditions, global warming, and El Nino on Europe and the UK. The scorching heat experienced this summer, particularly the first week of July, was reportedly the hottest ever recorded, according to the World Meteorological Organization (WMO). This article aims to explore some intriguing opportunities that have emerged from this summer’s drought theme.

We’ve already witnessed the challenges faced by the water utility sector, as detailed in an insightful article by our editor, which delved into the rationale behind the recent additions to our short-selling list. However, as extreme weather becomes increasingly commonplace worldwide, it’s crucial for our readers to be aware of other companies that deserve attention. This article aims to shed light on these potential opportunities.

How will the agriculture sector fare?

The next sector we will be looking at is the agricultural sector, since the extreme weather condition is most likely to have a direct effect on agriculture, based on studies conducted in 2022.

The agricultural sector has seen more than characteristic volatility recently, “The current drought has propelled volatility in June 2023 to meet and at times exceed June 2022 levels, and approach a 12-month peak,” according to a report on the CME Group CVOL Index. Part of the reason for the volatile market is the current extreme weather.

Corn Volatility

From the OECE-FAO 2023-2032 outlook: “Agricultural production systems face the challenge to adapt to a changing climate, including more frequent and intense extreme weather events. Mitigation and adaption solutions include large-scale and inclusive adoption of climate-smart and carbon-neutral production processes and technologies.”

The next company we will introduce is a significant player in the agricultural sector, particularly since their technology focuses is enhancing crop yields, improving disease and pest tolerance, and making seeds more adaptable to climate change and regional conditions.

Does KWS Group have solutions to drought challenges?

KWS Group, officially recognised as KWS SAAT SE & Co. KGaA, is a prominent entity in the global agricultural industry. The company, listed on the German XETRA stock exchange, boasts a market capitalisation of approximately EUR 1.907. KWS Group’s core business revolves around plant breeding and the production of an extensive range of seed varieties tailored for agricultural use. These varieties are specifically bred to enhance yield, increase disease tolerance, and adapt to shifting climatic conditions, including drought resistance. The company’s portfolio encompasses seeds for sugar beet, corn, cereals, and vegetables.

Operating in over 70 countries, KWS is known for its innovative and sustainable solutions that cater to the demands of modern agriculture. The company’s growth trajectory has been commendable, with recent reports underscoring its robust returns on capital. Notably, insiders hold a significant 54% stake in the company, reflecting a high degree of confidence in KWS Group’s future prospects.

Quoting from the Agricultural Outlook for 2023-2032, “Global crop production growth will mainly be driven by increased productivity rather than increased land use. Therefore, investments in raising yields and improved farm management are essential … yield improvements are projected to account for 79% of global crop production growth.”

Given the increasing global demand for such technology, it is foreseeable that KWS Group is well-positioned to capitalise on these opportunities.

KWS Group financial performance

We will now dive into some numbers to illustrate how KWS is performing financially. We will examine the latest financial report of the first nine months of the fiscal year; due to the seasonal nature of their business, the third quarter generates around half of the annual net sales.

KWS Group has demonstrated robust growth in the review period, with a notable increase in net sales by around 25%. This surge was propelled by a combination of strong market demand, favourable pricing for agricultural products, and an uptick in seed sales prices due to rising costs in sourcing, energy, and personnel. Additionally, seasonal shifts in some cases have positively influenced the company’s performance.

Each of KWS’ product segments played a significant role in the company’s impressive growth during the first nine months of 2022/2023. The Corn Segment experienced robust growth in key markets like Europe and Brazil. The Sugarbeet Segment, thanks to successful product innovations, achieved a substantial increase in net sales, further solidifying its leading position in the global market. The Cereals Segment, which typically generates most of its annual net sales in the first half of the year, also saw a significant sales increase, particularly in oilseed rape, wheat, and rye seed. The Vegetables Segment continued to benefit from heightened demand, especially for spinach seed in the U.S. and China.

In the first nine months of fiscal 2022/2023, KWS Group’s net sales grew sharply by approximately 25%, reaching €1,514.0 million, up from €1,213.7 million. The Corn and Sugarbeet Segments were major contributors to this growth, accounting for around 44% and 36% of total net sales, respectively. Most of the business was conducted in Europe, which contributed 63% of net sales, with Germany alone accounting for 17%. Meanwhile, the share of net sales from North and South America rose to around 29%.

The company’s key indicators for operating income also saw a significant increase. EBITDA rose by 31.8% to €334.8 million, and EBIT increased by 40.5% to €261.2 million. However, net financial income/expenses saw a significant drop to € -18.7 million, primarily due to a decline in the interest result to € -24.5 million as a result of rising interest expenses. Despite this, earnings after taxes were €178.2 million, or €5.40 per share, marking a 31.8% increase.

Investing activities led to a slight increase in net cash used, reaching € -62.4 million. During the first nine months of fiscal 2022/2023, KWS Group invested a total of €71.5 million in property, plant and equipment, and intangible assets (excluding leases).

The company’s capital spending primarily focuses on building and expanding production and research and development capacities. However, these investments will require time to yield observable effects. The increase in working capital primarily led to a rise in net debt, which reached €684.9 million.


Risk and opportunity for KWS Group

Since June 30, 2022, KWS Group has experienced a significant shift in its risk and opportunity landscape. The company’s business in Russia is now subject to increased political risks due to the Russian Ministry of Agriculture’s efforts to localise and control the local seed market. Despite these challenges, KWS Group’s business performance has not been significantly affected so far, demonstrating the company’s resilience and adaptability.

Strategically, KWS Group sees substantial opportunities in advancing sustainable agricultural practices. The company is focused on developing new variety traits that can improve crop yields and reduce the use of fertilisers and pesticides. This strategy not only provides cost-saving benefits for customers but also contributes to reducing their carbon footprint, aligning with global efforts to combat climate change.

In terms of research and development, KWS Group is committed to enhancing plant yield potential, improving resource efficiency, and developing plant resistance to various adverse conditions. However, these intricate processes come with their own sets of risks. These include internal technical issues, delays in processes, and external factors such as climate change, the emergence of new diseases, and restrictions on the use of operational resources. Despite these challenges, KWS Group continues to innovate and adapt to ensure the sustainability and growth of its operations.

The 52 week range of KWS group is €53.50 – €67.50, now trading at €58.00, with a 12.7x P/E ratio, one of its lowest in the past five years, compared to the industry average of 16.3x P/E. If our readers have a place in their thematic portfolio, KWS group deserves some attention.

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