Australia | Mar 22 2018
Nufarm is expected to sustain a period of growth from FY19 as recent acquisitions are consolidated and the Omega-3 commercialisation accelerates.
-Several factors driving earnings and cash flow beyond seasonal conditions
-Organic growth achieved despite little or no market growth across core geographies
-Scope for upside as Omega-3 expected to contribute from FY19
By Eva Brocklehurst
Nufarm ((NUF)) is bedding down recent acquisitions and moving forward on its Omega-3 project. First half earnings revealed a better performance in North America which offset a weaker contribution from Europe.
The results were a little weaker than many expected, largely because of a plant shutdown at Laverton in Australia and the challenges in Latin America. Earnings are skewed significantly towards the second half so full year guidance is not changed.
The business will always be exposed to seasonal fluctuations but Bell Potter observes a period of growth is very likely over FY19-21, as recent acquisitions are consolidated and the initiatives around working capital and Omega-3 accelerate.
There are several primary drivers of earnings and cash flow beyond seasonal conditions, the broker points out, including delivery on cost reduction targets, further working capital releases from investment in systems, delivery on the Omega-3 initiative and delivery on earnings targets for the Century and FMC European acquisitions. Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $10.05 target.
The result allayed some concerns, Macquarie acknowledges, and confirms there is still positive underlying momentum. The company now needs to deliver on expectations. Australia disappointed in the first half, although the broker notes the Laverton plant is now up and running and brand merging of Nufarm and Crop Care has been completed.
Seasonal conditions will now be in focus, particularly in Australia, as the winter crop planting gets underway in April. The broker notes positive feedback from the distribution channel regarding the European acquisitions amid the increased scale and relevance that these opportunities provide Nufarm across key product areas.
Organic growth was achieved across core geographies, despite little or no market growth over recent periods, Ord Minnett observes, and further opportunities exist with the commercialisation of Omega-3 canola and the recent acquisitions.
Margin uplift should provide benefits once the company's performance improvement program is finished and the broker notes increased valuation support for the stock, upgrading to Buy from Hold.
Deutsche Bank goes against the grain, with a Sell rating, noting the stock is trading at a sizeable 27% premium to the broker's $6.85 valuation. The broker was disappointed with the European market in the first half, although North America and the seeds business surprised to the upside. FY18 earnings estimates are downgraded by -6% to reflect lower expectations from Australia, Asia, Europe and Latin America as well as higher interest costs.