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Research Note - Deveron Corp. (FARM:TSXV,$0.50|BUY $1.50 TARGET) Another Strong Soil Lab Acquisition

Yesterday after market close, Deveron announced that it has signed a definitive agreement to acquire Frontier Labs. Frontier Labs is a leading soil lab and agronomy company servicing Iowa and Minnesota. Frontier Labs influences 320K acres annually through its soil lab and soil sampling services, and will increase FARM’s soil lab capacity by 200,000 samples annually. The acquisition adds local relationships in one of the largest agriculture regions in North America; a factor we continue to believe is instrumental to gain the trust of farmers and agronomists, promoting strong customer retention.

The acquisition aligns with Deveron’s core strategy of vertically integrating its business model, from data collection to data analytics. The acquisition marks Deveron’s fourth soil lab transaction. FARM is building out a hub model in the U.S. where it can route assays from different regions to centralized soil labs, which should provide support for margin expansion. The total consideration for Frontier Labs is US$2.2M, which is comprised of US$825K in cash upon closing, US$412.5K in cash on each of the first two anniversaries, US$275K in stock upfront and US$137.5K in stock on each of the first two anniversaries. Deveron may be required to make three additional earnout payments based on Frontier achieving positive EBITDA growth over the NTM. Frontier will be entitled to 25% of the incremental EBITDA in cash as well as stock equal to the EBITDA earnout divided by FARM’s stock price (with a maximum of 280K shares). Frontier posted $C2.1M in revenue and C$450K in EBITDA in 2021, implying 1.4x trailing sales and 6.7x trailing EBITDA. We remind readers that the A&L Labs acquisition was completed at 5x trailing EBITDA. Assuming no growth in Frontier’s EBITDA next year, the acquisition adds ~$0.05/share to our target price (still rounded to $1.50/share).

Deveron will be financing the acquisition using equity raised from European Impact Fund, Coeli Circulus. Deveron raised $2.7M in gross proceeds through the issuance of 5.4M shares at $0.50/share (previously 3.0M shares). Our Thoughts: We continue to be impressed by Deveron’s execution of its M&A strategy, completing a transformative acquisition and two solid tuck-ins so far this year. Deveron is now one of the only fully vertically integrated agriculture data companies in North America and we think its data and customer flywheels have potential to disrupt the heavily fragmented agriculture industry. With Deveron expecting to hit EBITDA profitability well ahead of schedule due to the A&L acquisition, we are expecting an aggressive re-rating in the stock. Additionally, we believe Deveron’s business model will transition to a SaaS-like model as data collection customers are converted to data analytics customers, increasing gross margins and providing justification for multiple expansion. We are maintaining our $1.50/share target price on FARM based on 17.0x 2023E EBITDA.

20221005 - M Partners - FARM - Frontier
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