Australia | Sep 27 2017
Brokers accept the outlook for Nufarm is improving on several fronts but many suggest the stock is fairly valued. Will acquisitions provide more impetus?
-Continuing challenges amid soft commodity prices, volatile seasons and price competition
-Improved mix of higher margin product should help in FY18
-May be difficult to undertake an acquisition of size
By Eva Brocklehurst
Nufarm ((NUF)) is expected to continue showing the benefits from lower costs and market share gains, having reported a robust FY17 result. Risks heading into FY18 are largely centred on seasonal conditions in Australasia and North America, as well as turning around the business in Argentina.
The company reported an underlying net profit of $136m for FY17, up 25%. Growth was driven by the performance improvement program that provided a net incremental benefit of $26m, and more than $15m in net incremental benefits are expected in the current year. Double-digit sales growth occurred across all divisions except Europe, while earnings were strong with the exception of a decline in Argentina.
In the absence of an acquisition, brokers believe the company will continue to confront challenges in crop protection in the form of soft commodity prices, volatile seasonal conditions and competition on price.
Citi found a lot to like in the latest results but considers the stock fairly valued, despite the guidance for further growth in FY18. The company has guided to improvements from a combination of growing revenue, margin expansion and cost savings.
Commodity prices are expected to remain soft. In Australia, the weather is the usual caveat, and spring/summer rains in northern NSW and Queensland are needed to generate demand for crop production products.
Despite this, Citi suggests an improved mix of higher margin products, with the merger of the Nufarm and Crop Care marketing arms, should help. In the US the company expects to benefit from new products and in Brazil the volume of crop protection inputs is also expected to rise.
Nufarm is also on track to start its first commercial production of Omega-3 canola in FY18-19, targeting positive earnings by 2021. Macquarie acknowledges that Argentina was the main reason Latin American margins were dragged down in FY17 and better leverage from higher margin products is envisaged in the future.
A modest recovery in Argentina and new seed product launches are expected to be the key contributors to the growth outlook in FY18 and underpin the broker's Outperform rating.
Morgans found the FY17 result credible, given challenging market conditions, and particularly as peers reported weak results. Market share gains and the performance improvement benefits make it evident to the broker that the company is doing a good job managing factors within its control.
The company is looking at opportunities that may arise from divestments following industry consolidation among the global operators. Nufarm plans to strengthen its product portfolio in key crops and across core geographies. Citi considers the stock an “event play” given this potential, while Macquarie suggests the northern hemisphere would be of more interest to the company from a strategic perspective.
Even in the absence of acquisitions, the broker considers the company able to deliver growth, as it rationalises and improves its business. The company has stated it will remain disciplined on acquisitions, looking at the returns on funds employed and growth in earnings per share as key metrics. Nevertheless, any sizeable opportunity will require a large capital raising, Morgans suggests, given the state of the balance sheet.
This aspect also concerns Deutsche Bank, which believes it will be difficult to undertake an acquisition of size. The company has made good progress with its improvement strategy, although the broker believes this is incorporated into the current share price.
Deutsche Bank remains of the view that Nufarm is not likely to participate in the current round of crop protection consolidation, as Sumitomo has a 23% shareholding and any divestments available are likely to be sizeable and vigorously contested. Press reports have suggested the company is interested in acquiring either The Century Group assets in Europe or Albaugh, a private generic operator in North and South America.
Bell Potter currently assumes no material acquisitions in its forecasts. The broker downgrades FY18 estimates by -0.7% and raises forecasts by 1.4% for FY19. The downgrades in FY18 principally reflect a lower summer crop forecast for Australia, offset in part by better operating results.
Upgrades in FY19 reflect the benefit of more normal summer and winter crop assumptions for Australia. The broker, not one of the eight monitored daily on the FNArena database, retains a Hold rating and $9.47 target.
FNArena's database shows two Buy ratings, four Hold and one Sell (Deutsche Bank). The consensus target is $9.16, suggesting 4.5% upside to the last share price. Targets range from $6.75 (Deutsche Bank) to $10.75 (UBS, yet to comment on the results).
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