The credit ratings firm stressed the positive macro environment fundamentals while giving Archer Daniel Midlands (ADM) an ‘A’ rating. The score reflects ADM’s strong business profile, which is supported by its scale, and the operational and geographical diversity of the firm's agricultural commodity operations, said Fitch.
Current supportive fundamentals for agribusiness groups like ADM, said Fitch, include strong demand pull from China driven by grain restocking and growth in feed consumption and increasing oil demand given growing renewable green diesel demand. Further relaxation of social distancing restrictions and lockdowns due to vaccine expansion will also support increased consumer activity and foodservice recovery, according to those analysts.
“Argentine farmers could remain reluctant sellers during at least 2021 due to the country's continuing financial and economic challenges, which would benefit global crush margins.”
However, Fitch noted risks to the favorable outlook, including elevated commodity prices that result in demand destruction, poor weather, crop disease outbreaks or further COVID-19 related restrictions that result in a slower than expected or disrupted global economic recovery.
Outlook for ADM
ADM's financial profile is buttressed by its strong and abundant sources of liquidity, it added.
The company’s focus on reducing earnings volatility and improving return on invested capital through new investments, cost efficiency initiatives, various asset divestitures and JVs to improve asset utilization during the past several years has improved operating results, according to Fitch.
The group’s significant business profile diversification as one of the largest global agribusiness firms is supported by leading positions across its core operations, including processing assets for oilseeds and numerous other agricultural commodities, crop-origination services, and carbohydrate solutions. “ADM also benefits from several joint ventures and equity stakes in various companies including a 22% minority stake in Wilmar International Limited that increases exposure to Asia.”
ADM increased its exposure to higher-growth, value-added assets through M&A and organic investments, particularly targeting the nutrition segment, noted the credit ratings agency.
“This includes M&A platform acquisitions of WILD Flavors in human nutrition, Neovia in animal nutrition and Biopolis in health and wellness.
"The nutrition business experienced improved profitability in 2020 as operating profit increased by 37% to US$574m. The improved scale and profitability resulted from Neovia synergy capture, improved lysine performance, scaling of past organic investments and broad-based growth across all four nutrition sub segments.”
Over the longer term, it noted that ADM has a target to increase earnings contribution from the nutrition segment to US$1bn of operating profit by 2024, through further growth and margin expansion of existing investments and bolt-on M&A, including increased exposure to health and wellness assets.