1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Basic Materials||52-Week Range: A$7.25 – 9.60|
|Industry: Chemicals||Market Cap: $2,466.0|
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:
1. Integration risk associated with recent acquisitions.
2. Adverse movements in commodities prices.
3. Unfavourable seasonal impacts.
4. Competitive pressures.
5. Adverse currency movements.
6. Regulatory risks.
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.
Trading update – key points.
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.
Harsh Aussie weather takes its toll. Australia has experienced one of the driest autumns in more than 100 years, resulting in an extremely poor winter crop season. With demanddown, competitive pressures have increased leading to inventory build-up and margin pressure. The negative mix shift to lower margin product also contributed to adverse earnings. However, in our view, the Company is well placed to weather near-term seasonal impact given the productivity improvements over the recent years. In the current trading environment, NUF also believes it has retained its market share in Australia.
Near-term company catalysts. We see the following share price catalysts for NUF:
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.
Attractive relative valuation. As a result of the recent share price correction, NUF’s valuation is screening attractively relative to global peer group. On an EV/EBITDA trading multiple, on a 2-year and 3-year view NUF is trading below both domestic and international peer group.
Updated valuation. We have lowered our estimates for FY18 and FY19, now sitting below company guidance. We have also updated our working capital assumptions, largely in guidance with NUF’s guidance. Our price target reduces to $9.70.
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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
Figure 2: NUF PE multiple vs long-term average
Figure 4: 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.