AGRINEX
GREENHOUSE |
| Entering
the European market with expanded operations -- Arrangements are in place with
the Aalsmeer auction (trading) house in the Netherlands and management now seeks
a strategic investor, partner or financier. Building on gains established under
past World Bank, Lincy Fund financing and using up-to-date Dutch cut flower technologies,
Agrinex now proposes to enter European markets. Company: Agrinex CJSC Amount: US$ 7,170,000 Tenor/Terms: Preliminary terms - US$ 2,000,000 equity financing and US$ 5,170,000 loan financing. Documentation: The following documentation may be reviewed during business meetings: Detailed feasibility study; Corporate Charter, Audited Financial Statements for 1999, 2000 and first quarter of 2001; Certificate of Ownership; Sales agreements - Naresh Floral Trading (UAE), Sikom(Moscow, Russia), Quotations by: (a) Agrisovgas (Gasprom subsidiary, Russia) for greenhouses construction; (b) packaging companies (Broekhof, Netherlands and Grand Sun, Armenia); (c) Euroterm, General Distributor of Osby Parca, Sweden and Weishaupt, Canada in Armenia for boiler delivery and assembly; (d) Intermotor Armenia, General Distributor for DaimlerChrysler in Armenia for Vito and Sprinter vans; (e) P.Kooij&Zonen B.V., Piet Schreurs de Kwakel B.V., Van Ruitten, Sunfield, Netherlands and Toscaflora, Italy for seeds and seedlings supply; (f) Armenian Airlines for air transporting flowers; (g) G.V.D.Put, Netherlands for domestic transport as well as Letter by Credit-Yerevan Bank, Armenia. Use of Funds: Greenhouses construction 5,140,000 Storehouses construction 250,000 Equipment (boilers and cool stores) 450,000 Transport 50,000 Assembly works and other 200,000 Consultancy 60,000 Total Investment 6,150,000 Purchase of plants and working capital 1,020,000 Grand Total 7,170,000 Investments will be required in tranches of 11-month duration. Legal Status: Agrinex is incorporated as a CJSC with US$1,980,000 of its own capital. Local/Strategic Partners: Sed Marsed Investment Consulting Company, Brabion Flora Service, Armenian Airlines, Intermotor Armenia Corp., Euroterm, Credit-Yerevan Bank. Current Operations: Agrinex CJSC currently grows flowers (carnations, chrysanthemums, lilies, cala lilies and gerberas) and vegetables. Total greenhouse area is 2.7 ha, about 70% of which is devoted to flowers. Until mid 2000, the company constructed greenhouses by stages. Total sales for year 2000 were US$185,000 and in the first quarter of 2001 - US$152,000. Projected sales for the year 2001 are estimated at US$890,000. About 80% of flowers were exported in year 2000, while vegetables (particularly tomatoes and cucumbers) were sold in the local market. Agrinex has now had three years of operational experience in producing and exporting floriculture products and has carried out a market analysis of Dutch, Russian and local markets. Sales and Marketing Plan: The overall marketing philosophy of Agrinex comprises: high quality production, sales and services, lower cost of production and sale, resulting overall lower prices, growing share in local and foreign markets and high competitiveness. Beginning mid-2001 Agrinex plans to arrange regular trading in Aalsmeer flower auction (VBA) where over half of Dutch flower exports (est. NLG 7 billion) are traded. In 1999 twothirds of the Aalsmeer auction sales (NLG 3 billion) were from cut flowers. Some 85-90% of Agrinex flowers will be exported to Europe and another 10-15% to Russia. Although recently Russian imports have dropped considerably, since 1998 Agrinex has had strategic local Russian partners and benefits from high-end prices in the Russian flower market (mainly Moscow and St. Petersburg). With project implementation, projected sales in 2003 are expected to average US$4 million annually. Of this, 50% from carnations, 17% from calas, and 12% from gerberas. About 8.5% of profits are expected from the sale of vegetables. Business Plan: The primary objectives are to expand the greenhouse area some 2.5 times (up to 7.7 ha) and enter the European markets. To support these, it is planned to purchase and build new greenhouses with help from a strategic investor. The associated improvements in quality, packaging, and up-to-date transportation to flower auctions are also planned. Agrinex has already reached preliminary agreements with Aalsmeer flower auction (Netherlands). As calculated, the annual return on sales is about 55% in the break-even year 2004, and return on assets is 25% with a corresponding return on equity of about 32% and the overall internal rate of return of the project is calculated at 19%. Under a proposed second stage of development, the strategic plan for Agrinex considers establishing a holding to possibly include Hrazdan Greenhouse (formerly the largest greenhouse in Caucasus, Turkey, Iran and Middle East), a cargo and a trade companies. The holding company, will also mainly engage in exporting flowers, vegetables and fruits from Armenia, internationally. Competition: In European cut flowers Netherlands-based suppliers and traders dominate in 23 of top 25 largest markets. Along with potential Dutch competitors almost all large cut flowers exporters of the world, particularly from Israel and Ecuador, also are in the market so competition is international. Nevertheless the free competition is in the European flower market. Given its auctions, a large number of sellers and buyers can effectively trade in spite of Dutch traders predominance. Agrinex estimates that even selling the product at minimum auction prices will allow the company s profitability to be high. In addition, Agrinex' regular partners in the Russian market are expected to provide stable sales. Nevertheless, Russian market is considered as an alternative one, and in the domestic market the company takes exclusive position due to its significant volumes and low prices. Investment, Capital Cost and Financing Structure Proposed: Proposed equity financing is US$ 2,000,000 (July-August 2001) Proforma size of dividends is set as 50% of net profit. Long-term debt financing is US$ 5,170,000 assumed at 8% interest rate with loan redemption starting in September 2003 and repaid by October, 2007. -- to be raised with the following schedule: Tranche I - US$ 4,450,000 (July-August 2001) Tranche II - US$ 270,000 (March-April 2002) Tranche III - US$ 450,000 (May-June 2002) Regulatory Considerations: According to government decision of June 1, 1997, customs duty is not imposed on exported flower product. No VAT is imposed on agricultural produce as well. According to the law of December 26, 2000, the profit tax rate is 20% on taxable profit (joint ventures don t pay profit tax during 2 years after their registration, and pay 50% of profit tax during next 8 year). There is no restriction for establishing joint ventures. Foreign exchange perations are wholly free with no restrictions on repatriating profits on capital invested. Armenia joined EC in January 2001 and the government programs supporting exports to Europe are expected to be rather favorable. Numerous inter-state trade, fiscal and customs agreements with the Russian Federation CIS countries will be taken advantage of and the currency and investment legislation of Armenia is one of the most liberal ones throughout the whole FSU. Other Project Details: The project implements the strategic vision of Agrinex: (a) to become a competitive worldwide producer; (b) consolidate its leading position in the domestic vegetable market; and (c) expand operations by reconstructing in areas with low employment. With the proposed expansion, Agrinex will (a) extend production capacities and reach 2.8 times the sales volume by 2004 to boost its supply to the largest international flower auctions of Netherlands (particularly Aalsmeer) beginning in mid 2001. Additional supplies to other European (Germany and France) markets will be possible in 2002 and 2003, from developing the Hrazdan Greenhouse in the Kotayk region. This business expansion will enable effectively upgrading and improving quality to compete with Dutch producers as latest technologies in modern greenhouses and production culture, etc. will be deployed. This strategic development of the greenhouse area, 2.5 times by 2004, will enable Agrinex present market share to grow with entry into new markets. Since 1996, the greenhouse development has been supported by share capital (US$ 650,000) and long-term loan of US$ 350,000 under the World Bank EDP project and the greenhouses operated on 0.5 hectares. Another 1 ha was put into operation in March 1999 using a US$ 900,000 loan from the Lincy Fund and US$ 100,000 from Agrinex' own capital. The current financial position is as follows: In US $ Jan 1, 2000 Jan 1, 2001 Mar 1, 2001 Current Assets 685 270 970 948 938 813 Fixed Assets 2 736 325 2 499 785 2 452 619 Assets 3 421 595 3 470 733 3 391 432 Current Liabilities 1 229 040 156 804 123 975 Long-term Liabilities 1 390 771 1 326 300 1 301 275 Equity Capital 801 784 1 987 629 1 966 181 Liabilities & Equity Capital 3 421 595 3 470 733 3 391 432 Mr. Vahagn Khachatryan is the General Director and Chairman of the Board of Directors; Mr. Mihran Nazaretyan is the Deputy Director and Ms. Larisa Simonyan, the Phytopathologist. Mr. Khatchatryan is a member of the Royal Horticultural Society (UK) and the Botanical Society (US). The financial and marketing partner is Sed Marsed Investment Consulting Co. Agrinex also works with Dutch companies supplying seeds and seedlings whose experts also function as Agrinex' technological and quality advisors. The total projected production area is 7.7 ha yielding flowers and vegetables as shown below: Flowers Area occupied (ha) Yield Kg/ sq m Yield per season (Kg) Cala lily 0,9 140 1 260 000 Carnation 2,8 280 7 840 000 Chrysanthemum 0,45 100 450 000 Rose 0,45 150 675 000 Lily 0,18 54 97 200 Gerbera 0,9 175 1 575 000 Vegetables Area occupied Yield Kg/ sq m Yield per season (Kg) Tomatoes 0.9 60 540 000 Cucumbers 0.9 30 270 000 Agrinex currently uses locally available packaging but plans purchase packaging materials, possibly from Broekhof or Grand Sun - strong double corrugated boxes with white wash and three color printed graphics, on an average costing US$1-2 each. Flights by Armenian Airlines to Amsterdam are twice a week so product can be stored for three days. Allowing two days for picking, packing and freezing and Yerevan - Amsterdam flight of 4.5 hours, and one day for delivery by G.V.D. Put (Netherlands), the maximum "picking to selling" will be 7 or 8 days. This complies with international practices of 6-10 days. With no dearth of sunny days and heating period from mid November till mid March greenhouses yield 150 days per year but planning is based on energy costs assumed to rise at 5% per year. A total staff of 232 persons cost US$ 245,121and after the first phase will be 528, or 2.3 times. Because of its nature greenhouse production doesn't have negative environmental effects. With the indicated financing arrangements and business plans a high gross profit margin is forecast during the entire project period at 75%. Net profitability rises to 40% from 2003 and retained earnings by end 2008 expect to reach US$3,830,000. As a result NPV is estimated at US$2 million and an IRR of 19% is projected. The project will be implemented from 2001 to 2008. Stage Time Pre-production Start date Completion date Reconstruction of greenhouses August 2001 March 2002 Building of greenhouses August 2001 March 2002 Building of additional premises August 2001 March 2002 Cultivation Early April 2002 Mid April 2002 Construction and assembly will last 6 months under most extended time schedule as the mild climate of Armavir region will allow construction and assembly during winters. All revenue increases are projected to be realized from July 2001 (with 2 months probable lag for delayed financing). No clear-cut terms of strategic investor s exit are set and venture capital financing could be an option as well. Interest on term credit will be paid quarterly during the period from 2003 March till 2007 October at 8% annual rate. Principal redemption is planned in semi-annual equal payments to from September, 2003 to October 2007 allowing Agrinex an effective cash management policy. Points of Contact: Dr. Tigran Jrbashyan |