Rating: BUY (Initiation) 

Target price: USD42.74 

Share price (10 Aug): USD26.62 

Market Cap (USDm): 540.3 

Up/downside: 60.6% 

We initiate coverage with a BUY call and PT of USD42.74 (60.6% upside potential). Founded in 2016, Agrify specializes in advanced and proprietary precision hardware and software indoor farming solutions. It has become the only company to offer indoor farming automation with fully integrated solutions. 2020 revenue rose 196% yoy to USD12.09m and GPM lifted 10.7ppt to 4.7%. 

Sufficient resources for industry capacity lift; indoor farming enters the fast lane 

Technological innovations have sped up industry transformation, while high-quality and high-yield crops highlight the advantages of indoor farming: higher per-unit yield with vertical stack structures and a more precise control of the environment. According to Global Market Insights, the global vertical farming market could grow from USD3.16bn in 2018 to USD22.07bn in 2026E, a CAGR of 27.77% over 2019-26E. With gradual cannabis legalization across the US, the current global indoor cannabis cultivation market is more than USD100bn, where the US is the main consumer market. Joint forecasts by BDSA and Arcview Market Research as of 4 April 2020 suggest that legal cannabis sales in the US would amount to about USD34bn by 2025E, accounting for 72% of global sales of USD47bn. Our calculations indicate a long-term penetration rate of 100% for the indoor cannabis cultivation market, with a corresponding global market for indoor cannabis equipment at USD12.8bn. 

Agrify’s advantages include being the leading integrated solutions provider  

The company is currently the only provider of end-to-end integrated hardware-and-software solutions for indoor farming. At the same time, its proprietary standard operating procedures (SOP) customize solutions for different clients. Its 「hardware + software + services」 business model enhances customer stickiness. Agrify’s 「total turnkey」 (marketed as TTK) solutions provide clients with capital, construction, equipment and other support services. Under its revenue-sharing model, Agrify charges USD500-700 per pound of recurrent crops, based on the client’s crop price; this greatly boosts the company’s profitability. 

Precise planting data raises Agrify’s competitive barrier and advantages 

With accurate planting data and accumulated experience in the early phase, the company helps clients improve crop yield and quality, while increasing crop stability and crop quality consistency. Relative to the use of traditional indoor planting equipment, the company says its vertical farming units (VFU), which are located in a fixed facility area, generate about 4x the annual income while reducing unit cost by more than 30%. In July 2021, Agrify inked a long-term R&D cooperation agreement with Curaleaf, one of the largest medical cannabis multi-state operators (MSO) in the US.  

Tie-up with Inventronics enriches supply-chain resources 

In March 2020, Inventronics subscribed to Agrify’s newly issued USD400m A-series preferred convertible shares and brought supply chain synergy into play. We believe that tying up with leading upstream suppliers synergizes the industry’s advanced LED technology with Agrify’s farming equipment to develop products that help the company lower cost and boost the competitive effectiveness of its equipment.  

Valuation and risks 

We expect revenue of USD50.02m/86.74m/139.74m in 2021/22/23E, up 314%/73%/61% yoy, and net profit of USD -11.42m/-0.76m /20.45m, up 45%/93%/2,779% yoy. Along with the US federal-level cannabis legalization process, especially in terms of vertical indoor farm to farm, we expect Agrify’s high-quality, high-yield, low-cost business to keep growing fast. We consider it to be the only company that provides full automation in the indoor farming market. We recognize the investment scarcity of this integrated farming solutions company. We assign a PS of 10x in 2022E, corresponding to our target price of USD42.74. We initiate coverage with a BUY rating.  Risks include: market developments worse than expected; policy risks; industrial hemp being strictly distinguished from intermediate hemp material, recreational cannabis and drugs, with firm opposition to the legalization of recreational cannabis; business developments worse-than-expected; and cross-market valuation risks. 

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