28/09/18
NUF
A$6.70
A$8.55
BUY
Source: Bloomberg
Company Description
We rate NUF as a Buy for the following reasons:
We see the following key risks to our investment thesis:
Figure 1: NUF gross profit by product
Source: Company
Figure 2: NUF gross profit by geography
Nufarm Ltd (NUF) FY18 results were largely as expected given the trading update in July, with underlying operating earnings (EBIT) of $265m coming in at the upper end of the guidance provided.
It has been a tough 12 months for NUF (is this as bad as it gets?) and looking forward, market conditions are likely to remain tough (but improving) in the short term. The fact the Company was able to report a -1% decline in EBITDA, despite a $41m drop in Australian earnings, speak to the diversification benefits which we have previously highlighted.
Regardless of how investors view the rationale behind the capital raising announced, it does take the balance sheet risk question off the table. We maintain our Buy recommendation, as we see the current issues as 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.
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Figure 3: NUF FY18 key metrics
Source: Company, BITG estimates
Revenue for the year was up +6% on previous corresponding period (pcp) or up +8% in constant currency terms. The Company saw good growth in most of its regions including Europe, LatAm and North America. Group results were adversely impacted by the Australian drought and plant shutdown. However, excluding these, underlying gross profit margin was largely in line with prior year. As the flow chart below highlights, group operating earnings (EBITDA) was adversely impacted by ANZ drought and one-off impact of extended upgrades to ANZ plant. Largely offsetting this was the contribution from European acquisitions and organic growth in the Americas.
Figure 4: NUF group EBITDA drivers
Underlying SG&A as a percentage of sales increased on pcp driven by higher investments in sales & marketing to support European acquisitions, D&A up on the back of the acquisitions, whilst admin expenses were stable as a % of sales.
Working capital deteriorated during the year, with average net working capital (ANWC) / sales increasing by 350bps to 40.3%. It is expected to remain elevated in FY19 however the Company will look to drive working capital down to their medium target of 35 – 37% in FY20/21. Leverage (net debt / underlying EBITDA) increased to 3.0x (from 1.7x) during the year, driven by higher net working capital ($287m) and debt ($335m) from related European acquisitions.
Underlying NPAT of $98.4m was -27.5% prior year. Reported net loss after tax of $15.6m was driven by costs associated with acquisitions costs, high yield bond termination and ANZ impairment expense. Most of the significant expenses were non-cash in nature.
Australia / New Zealand. Management provided the following outlook: (1) partial recovery of margin / mix losses assuming average 2019 winter season and good post-emergent market; (2) invest in brand and grower pull-through initiatives; (3) manufacturing under-recoveries due to reduced throughput; and (4) expect to return to approximately $50m EBIT in FY20 (assuming average seasons).
North America. Sales were up +10% and underlying EBITDA up +11% for the year, with top line growth driven by higher volumes and more focused marketing efforts. On market conditions, soft commodity prices have impacted farm input spend, industry consolidation and uncertainty around tariffs on both exports and crop protection inputs. Sales and earnings growth are expected in FY19.
Latin America. Segment sales were up +8%, however underlying EBITDA was up +2%. Brazil saw sales up +11% in AUD (driven by volume) and Argentina sales fell -16% in AUD (however margins improved due to product mix).
Europe. Segment results were positively impacted by European portfolio acquisitions, with sales up +19% and EBITDA up +24%. The Company expects to deliver on FY19 acquisition targets.
Asia. Segment sales were up +3% for the year but EBITDA was down -11%. Sales in China were up +23% however this was mainly in lower margin products.
Seed technologies. The segment experienced solid top line growth, up +10% on pcp, however underlying EBITDA was down -4%. Management noted that Omega-3 canola registrations and commercialization was on track.
Figure 5: NUF Comps Table – consensus estimates
Source: BTIG, Company, Bloomberg
Figure 6: NUF Financial Summary
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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