Nufarm Limited

Fat Prophets

Friday 11th December 2015

Getting more out of the land

What’s new?

Management provided a trading update at Nufarm’s AGM last week, sounding a relatively cautious tone that was arguably the key reason why the shares subsequently retreated from their recent five-year high (in addition to general market weakness).

In terms of Australia, management noted that dry conditions through to October have been a headwind, but that good rain in early November on the eastern seaboard has seen sales subsequently pick up.

Sales and earnings in Asia in the first quarter were ahead of last year, with new product launches set to have a positive impact further out.

In North America the company has started off well, and did so despite a decline in soft commodity prices. Europe is also tracking ahead of last year.

Management probably sounded the least sanguine on Brazil, where wet weather has had some impact, but where the biggest headwind is coming from the local currency. Depreciation in the Brazilian real is set to reduce the total value of the market by 15 to 20 percent on the prior year. That said, weakness in the AUD has meant that first quarter sales are only slightly down (and ahead on a local currency basis) when reporting in Australian dollar terms.

Outlook

Encouragingly for investors, and notwithstanding potential headwinds from the onset of an El Nino weather pattern and continued exchange rate volatility, management expects a similar earnings performance this year compared to FY15. Specifically, management are forecasting half year EBIT (earnings before interest and taxes) to be ‘in line with or ahead’ of the prior year, while guiding to underlying earnings growth for the full 12 months.

Price

Nufarm is currently trading on around 18 times FY16 earnings, with this forecast to fall to 14 times FY17 earnings, the latter of which looks reasonable given our view that the market is underestimating the earnings tailwinds coming through over the next 12 to 18 months. Encouragingly for investors, Nufarm’s fundamentals are consistent with the stock’s technical outlook, which has improved in recent months. Despite the recent pullback, we envision downside risk to remain limited to a trading band between $7.30 and $7.60. And with the 14-day RSI heavily oversold, we would anticipate higher levels to begin returning in the near-term.

Worth buying?

The recent FY15 results underline how strongly Nufarm has performed despite headwinds on a variety of fronts. Management (led by a new broom) have been incredibly proactive in responding to the environment, lifting the company’s financial performance by innovating their offering, focussing on higher margin product, stripping out costs, while continuing to seek out further efficiencies.

This is streamlining the business, and increasing its leverage to strong long-term demand in the crop protection market, with the agricultural sector hungry for products that can lift yields.

While the company is not having it all its own way, we believe the overall investment thesis remains intact. That is, with the world’s land in fixed supply, and agricultural yields in focus, Nufarm’s value proposition is high.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Nufarm is held in the Fat Prophets Concentrated Australian and Small & Mid-Cap Model Portfolios.

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