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.
In contrast, Morgans believes the market should start to soon appreciate the company's attractive growth profile, finding the valuation undemanding. A material improvement in seed technologies was the highlight of the result, with a first half profit that compares with a usual seasonal loss. The stock remains the broker's key pick for exposure to the agriculture and chemical sector.
Credit Suisse also expects a little more upside can be squeezed out from the stock. With pressure on farm incomes unlikely to ease soon, the company continues to benefit from a preference for lower-cost commodity product that has driven market share expansion in Australia and North America. The broker finds it hard to envisage growth commensurate with the risk in Latin America, although some easing of margin pressures is expected in the second half.
While Morgans reduces FY18 estimates because of the timing of the European acquisitions, importantly, there is no change to FY19 forecasts, which is the first full year to benefit from the European acquisitions. Longer term, the broker believes the Omega-3 program could be a game changer.
CLSA believes the current share price effectively includes a free option on the Omega-3 project that could deliver both material profit upside from 2020 and lift the quality of earnings. The broker, not one of the eight monitored daily on the database, has an Outperform rating and $10 target.
Citi, too, believes the company is poised to enter a growth phase, supported by the recent acquisitions together with Omega-3. The stock is trading below historical valuation multiples and global peers and the broker reiterates a Buy rating.
The growth outlook is robust and Omega-3 is on track so there is scope for upside to valuation, in Morgan Stanley's opinion. The company has highlighted Australian regulatory approvals for the Omega-3 initiative and positive results in application trials, anticipating US and Canadian regulatory approvals in 2019. Morgan Stanley believes the potential upside associated with Omega-3 is not yet captured in the share price.
The database shows six Buy ratings and one Sell (Deutsche Bank). Consensus target is $9.78, suggesting 12.3% upside to the last share price. Targets range from $6.85 (Deutsche Bank) to $11.50 (Morgan Stanley).
See also, Brighter Outlook Emerges For Nufarm on March 8 2018.
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