Australia | May 25 2023
This story features NUFARM LIMITED. For more info SHARE ANALYSIS: NUF
After two strong years, brokers were not expecting much from Nufarm’s result, but earnings far exceeded forecasts.
-Nufarm's Seeds business thrives
-Geographic diversity a buffer
-Weak cash flow will reverse
-Longer term opportunity in new products
By Greg Peel
Nufarm ((NUF)) develops, manufactures, and sells crop protection solutions and seed technologies across the globe, operating through two segments, Crop Protection (herbicides, insecticides, and fungicides) and Seed Technology (grains, vegetables, turf, trees and more).
Like all agricultural companies, Nufarm is forever subject to the vagaries of weather, and has also had to deal with covid disruptions in recent years. The company enjoyed strong revenue growth in the past two years, particularly due to the surging price of glyphosate (weed control), hence brokers did not hold high expectations for Nufarm’s first half FY23 (year-end September) earnings.
Moreover, other ag companies, globally, have been reporting weak results due to the volatility of the ag market.
As it was, Nufarm reported slightly lower earnings than the bumper first half FY22, but still blew away broker forecasts.
The result was largely driven by a 34% increase in Seeds earnings, but also a solid result in Europe offsetting weakness in Asia-Pacific, after cycling those high glyphosate prices, and in North America, where farmers delayed purchasing as they watched ag-chem prices fall. The result underscores the value of the company’s geographic diversity.
This, and the strong Seeds result, helped buffer against more normalised demand patterns post-covid, Macquarie notes.
Not a Problem
One stumbling block was a big miss on cash flow, leading to increased debt, but brokers have shrugged this off. It was largely due to timing issues around inventory movements and lags between customer orders and payments which are expected to normalise in the second half, reversing the cash flow position and lowering debt.
Management continues to guide to “modest” earnings growth in FY23 (cycling a very strong FY22), which implies solid growth in the second half from a year ago. Management has also tweaked its first half/second half earnings skew expectation to 70/30% from a prior 65/35%.
Second half trading conditions have started well, with seasonal conditions broadly favourable. Due to the material decline in active ingredient pricing and higher manufacturer inventories, Nufarm expects some margin pressure in the second half, particularly in North America.
Brokers agree this can be offset by new products, improved product mix, and from Seed Technologies.
It’s been a long road to date, but Nufarm continues to progress the development of its omega-3 and bioenergy (Caranita) seed products along the commercialisation path. Brokers all agree this presents a longer term re-rating opportunity.
Brokers also agree the company is on track to reach its unchanged FY26 revenue target, and reaching it also suggests upside.
Nufarm’s near term performance, and longer term potential, has five out of seven FNArena database brokers carrying Buy (or equivalent) ratings.
Given Nufarm is a global company, it is much better positioned to withstand potentially drier conditions in Australia than the rest of the sector, Morgans notes. But dry conditions will likely weigh on sentiment given Asia-Pacific represents around 20% of group earnings. For this reason, Morgans maintain a Hold rating, while retaining Nufarm as its key pick of the ag and chemical sector.
Morgan Stanley also sticks with Equal-Weight.
Nufarm increased its first half dividend by 25%, to 5c from 4c, but Ord Minnett points out a “pedestrian” 2.2% yield, unfranked, is not exactly exciting, but Nufarm is a growth story.
Not what you’d expect for a company established in 1916. Ord Minnett retains an Accumulate rating.
The FNArena database shows a consensus target of $7.12, suggesting 30% upside from the current trading price. Targets range from $6.64 (Morgans; Hold) to $7.70 (Ord Minnett; Accumulate).
While Wilsons (not included in FNArena's daily coverage) posted an upbeat response to Nufarm’s result, this brokers retains Market Weight with a low-end target of $6.04.
Wilsons includes valuations for omega-3 and Caranita potential, but does not include any attribution for Nufarm’s key New Seeds program at this stage.
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