Australia | Mar 08 2018
Seasonal headwinds confront agricultural chemical supplier Nufarm in some jurisdictions but several brokers retain a positive view based on acquisitions and cost savings.
-Caution prevails re Latin America crop yields
-Omega-3 canola potential may be under estimated
-Changes to earnings drivers may not be fully recognised in share price
By Eva Brocklehurst
Agricultural chemical supplier Nufarm ((NUF)) is facing seasonal headwinds, as usual, but several brokers brush this aside, instead favouring a positive view based on the company's transformation program and acquisitions. Geographical diversity also provides support.
Argentina's worst drought in decades has ensured a poor crop, although Citi believes this should help reduce stockpiles and farmers may increase plantings, given a rally in grain prices. The broker believes the downside to Nufarm's business is minimal.
Bell Potter adopts a more cautious approach to earnings from the Argentinian crop because of low yields. Argentina accounts for over 15-20% of the company's Latin American business.
The broker is also careful about forecasts for Europe in light of recent inclement weather, as well as the drier-than-average finish to the Australian summer crop. These conditions suggest the focus will shift to the earnings growth profile through FY19-21 as this year progresses.
Yet, Bell Potter retains a favourable view on the stock based on the integration of the Century and FMC portfolios, as well as the cost savings to be delivered from back-office consolidation in Europe. Omega-3 canola is also expected to be profitable by FY21.
Citi, too, has a favourable view, upgrading to Buy from Neutral. The broker believes Nufarm is entering a period of double-digit growth calculated as a three-year CAGR of 11%. Recent acquisitions will introduce higher margins and the broker also flags the launch of Omega-3 canola.
The broker considers the shares oversold and offering a compelling buying opportunity, despite the weak first half guidance which has weighed on the shares recently, and anticipates a strong second half rebound.
Bell Potter reduces net profit forecast by -18% in FY18 and -3% in FY19. This is based on changes to the broker's settlement timeline for the Century acquisition and the contributions from FMC, which have a combined $110-115m pro forma in operating earnings (EBITDA).
The assumption for the close of the Century transaction is pushed out to the September quarter from the end of the first half, but forecasts for both assets in FY19-20 are unchanged.
Changed Earnings Drivers
Credit Suisse upgraded in early February to Outperform, believing the market is under-appreciating the long-term benefits of the company's transformation program.
The market may be struggling with the changes to earnings drivers, the broker also suggests. This view is based on improvements that emerge from a larger scale European position, a rebuilding of Australian market share and growth in the seeds business.
Moreover, Credit Suisse suggests a successful development of Omega-3 canola has not been factored into the share price and, while this contribution may not be completely certain, potential material upside exists.
There are five Buy ratings, one Hold (Ord Minnett) and one Sell (Deutsche Bank) on the FNArena database. The consensus target is $9.46, signalling 19.3% upside to the last share price. Targets range from $6.85 (Deutsche Bank) to $11.20 (Morgan Stanley).
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