Source: Bloomberg
Company Description
We rate NUF as a Buy for the following reasons:
1. Currents earnings headwinds are seasonal rather than structural.
2. Recent acquisitions of European products provide growth options.
3. Cost out to support earnings growth.
4. Attractive valuation relative to domestic chemicals’ peer group and international players.
We see the following key risks to our investment thesis:
Nufarm Ltd (NUF) provided a trading update which in many ways was largely expected by the market given the growing conditions its ANZ business has experienced recently and peer group updates. Australia has experienced one of the driest autumns in more than 100 years, resulting in an extremely poor winter crop season. With demand down, competitive pressures have increased leading to inventory build-up and margin pressure.
However, we must admit the magnitude of the downgrade caught us by surprise (and likely the market given the share price reaction, down -11.1%). The Company now expects FY18 underlying EBIT result to be in the range of $255-270, which is 11-16% below FY17 and previous guidance of +5% growth. We now expect a recovery in the ANZ business in FY20 (with FY19 likely to be tough as the industry works through the inventory).
We maintain our Buy recommendation, as we see the current issues transitory (seasonal) rather than structural. Over the medium to long-term, the European acquisitions, new product launches and Omega-3 continue to be positive drivers. With the recent share price correction, we believe investors may be now picking up some of these long-term options for little to no value.
1. Dry weather conditions in Australia have significantly impacted earnings, with FY18 EBIT contribution from ANZ expected to be $5-10 (vs. last year of $51.6).
2. Low levels of demand and currently over-supply is expected to constrained sales revenue and margin into FY19.
3. Due to the preceding points, management is reviewing the impairment implications for the ANZ business.
4. the Company expects net working capital (NWC) for the group at 31 July to be $200-300 higher than previous year, which will impact net debt levels and cash flow.
5. Due to the delay in NUF’s French derogation application, NUF is likely to miss the grower application window for the season, resulting in an approximately $12 earnings hit in FY18.
6. The Company now expects FY18 underlying EBIT result to be in the range of $255-270.
1. Update on the regulatory approvals for Omega-3 in the US/Canada and commercialization progress in Australia.
2. Securing derogation registrations for seed treatment use in France. Although substitute products (such as Acetamiprid and Lamba Cyhalothrin) can potentially mitigate gross margin risk in FY19.
3. New product launches.
4. Progress on European acquisitions.
ASK THE ANALYST
Attractive relative valuation. Given the recent share price correction, NUF’s valuation is screening attractively relative to global peer group.
Figure 1: Peer group comparable table – consensus estimates
Nufarm Ltd (NUF) is one of the world’s leading crop protection and specialist seeds companies. The Company produces products to assist farmers in protecting their crops against damage caused by weeds, pests and disease. The Company has manufacturing and marketing operations in Australia, New Zealand, Asia, Europe and the Americas.
1st March 2020
1st October 2019
25th September 2019
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