1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Materials||52-Week Range: A$6.70 – 9.47|
|Industry: Chemicals||Market Cap: A$2,165.0m|
We rate NUF as a Buy for the following reasons:
- Currents earnings headwinds are seasonal rather than structural.
- Recent acquisitions of European products provide growth options.
- Ongoing focus on operational efficiency to support earnings.
- Attractive valuation relative to domestic chemicals’ peer group and international players.
- Launch of Omega-3 canola business.
We see the following key risks to our investment thesis:
- Integration risk associated with recent acquisitions.
- Adverse movements in commodities prices.
- Unfavourable seasonal impacts.
- Competitive pressures.
- Adverse currency movements.
- Regulatory / litigation risks.
Figure 1: NUF gross profit by product
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.
- FY18 result. NUF’s full year underlying EBIT of $265m came in at the upper end of recently provided guidance of $255-270m and was -12% below prior year. As previously flagged, group results were impacted by the drought conditions in Australia, whilst the Europe results were boosted by acquisition contributions. During the period, management noted NUF experienced “tough competitive conditions with lower soft commodity prices, putting pressure on both demand and the pricing of farm inputs”.
- Diversification benefits coming through. NUF’s group EBITDA was down -1% on prior year, despite the Australian/New Zealand segment reporting a -63% (or -$41.2m) decline in EBITDA.
- FY19 outlook. “The combination of revenue growth, partial recovery in the Australian business and the full year impact of the European acquisitions is expected to result in earnings growth in 2019. This is despite an expectation that soft commodity prices will remain low and market conditions will remain competitive. EBITDA is expected to be in the $500 to $530 million range for the FY19 financial year”.
- Second half skew likely to weigh on sentiment. NUF’s FY19 guidance implies a second half (2H) skew, which could make some investors nervous and provide a share price catalyst at the half year results update depending on management’s 2H outlook comments. The 2H skew is driven by:
1. Australian drought related impacts;
2. European portfolios are weighted towards 2H.
- Capital raising removes balance sheet risk. NUF has announced a $303m fully underwritten pro rata entitlement offer to shore up the balance sheet and retain the flexibility to invest in its growth strategy despite the current uncertainty in the market. Post the completion of the raising, NUF’s pro forma net debt / EBITDA will fall to 2.4x from 3.0x. The new shares will be offered at $5.85, which is a 10.4% discount to dividend adjusted TERP of $6.53 and 11.9% discount to the dividend adjusted last close price of $6.64. What is likely to cause some market conjecture is the fact that major shareholder Sumitomo will not participate in the offer.
FY18 Results Summary…
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
Source: BTIG, Company, Bloomberg
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.