FY 2018 EBIT guidance held: Agrana’s first trading update in the new EU sugar environment came in weak, as expected, with Q3 EBIT (including JVs) -19% yoy to EUR41.0m and EPS -6% to EUR1.96. Importantly, FY 2018 EBIT guidance was maintained for a “significant” (ie over 10%) increase in EBIT (including JVs) from the EUR172m FY 2017 base level (+25% ytd) despite pricing pressures in Sugar reducing group sales guidance from “moderate” (ie 5-10%) growth to slight (ie by 1-5%) from the EUR2.56bn in 2017. We reduce our EPS estimates by 2-3% reflecting the more challenging sugar market pricing. We maintain our Buy recommendation; however we reduce our price target to EUR135.00 to reflect the estimate changes.

?  Sugar: Sugar EBIT declined 7% yoy in Q3 to EUR7.1m (4.1% margin, -60bp yoy). With EU sugar prices now below EUR400 per tonne (down over 20% yoy) following a strong EU harvest and quota abolition, the outlook for Sugar is more challenging. Management still expects a significant EBIT increase yoy from EUR24.4m last year (+82% ytd), however an underlying decline in FY 2019 is likely. Agrana is (apparently) close to finalising the acquisition of the Sunoko Serbian sugar business; we forecast the deal will close in Q1 2019 with Agrana taking a 51% majority stake for cEUR200m as per the original deal terms but we believe the delay in closing is partly related to Agrana looking to take a larger stake (and disruption in the sugar market impacting valuation expectations).

?  Fruit and Starch: Fruit EBIT fell 5.5% yoy in Q3 to EUR15.6m (5.5% margin, -40bp yoy). Fruit preparations delivered significant EBIT growth supported by favourable emerging market consumption trends (boosted by a recent acquisition in Argentina), but the more commoditised fruit juice concentrate business saw significant EBIT declines. Low EU apple availability saw reduced capacity utilisation in the harvest quarter; however, management believes this will not impact EBIT going forward. Starch EBIT (including JV contribution from Hungrana) fell 24% to EUR19.9m despite flat sales due to the impact of higher raw material costs and ramp-up costs at Aschach.

?  Our view: Agrana trades on 11.5/11.0x calendar 2018/19E P/E and 6.5/6.0x EV/EBITDA, which is a significant 20% discount to our forecasts for Südzucker (and other agricultural commodity players) trading on 14x calendar 2019E P/E. Our three-year EPS CAGR is 7.5%. Agrana has a balanced business model across European agricultural commodities (sugar, grains and fruit) and comes with an attractive dividend yield over 4% and with significant financial flexibility. Even factoring in the Sunoko deal, net debt/EBITDA will go from 0.5x 2018E to just 1.3x 2019E, with continued earnings momentum from organic investments (eg Aschach starch expansion, fruit preparations China and Hungary).