Nufarm Limited

Company Overview: Nufarm Limited (ASX: NUF) is an Australasian marketer and manufacturer of chemicals. It is also engaged in the manufacture and sale of crop protection products and its proprietary seed technologies business. The business of NUF has two reporting segments, namely Seed Technologies and Crop Protection. Seed technologies combine the seed treatment portfolio and the Nuseed business whereas Crop Protection develops, manufacture, and sell crop protection solutions including herbicides, insecticides and fungicides that help growers protect crops against weeds, pests, and disease.

NUF Details

Cost-Competitive Business Model and Decent Increase in Revenues: Nufarm Limited (ASX: NUF) is an Australasian marketer and manufacturer of chemicals. It is also engaged in the manufacturing and sale of crop protection products and its proprietary seed technologies. As on 18 August 2020, the market capitalization of the company stood at ~$1.64 billion. 2019 has been a year of significant progress and change for Nufarm Limited. During the year, the company progressed the integration of the European portfolios and made significant progress in bringing a large, new value stream with omega 3 canola. During FY19, the company focused on strengthening its business to improve returns. The company aims to build a cost-competitive business model and is focused on improving the quality of earnings to create a strong platform to support continued profitable growth.

NUF has a large scale and global distribution footprint, making it an attractive partner for major manufacturers and research organizations. During FY19, group revenues went up by 14% to $3.76 billion, up from $3.31 billion in FY18. The increase in revenues, however, was partially offset by the impact of increased competition, cost pressures and pricing pressure resulting in a decline in gross profit margin to 27.5% from 29.1% in the prior year. In the same time span, underlying EBITDA of the company increased by 9% to $420 million, mainly due to the contribution from the European portfolios and decent earnings in North America, Seed Technologies, and Asia. However, continued drought in Australia, supply disruptions in the European business, and extensive flooding in North America impacted earnings for FY19. The company managed to respond to the external challenges and strengthened its business with the equity raising and a deleveraging program to further reduce debt.

NUF has made significant investments during the year and is likely to benefit from increased earnings along with continued improvement in its Australian business. The company is maintaining its gross margin and is working on improving its product quality.

The company has invested in future growth and is working on improving its global competitiveness by broadening its European portfolios and strengthening its pipeline of new products. NUF is confident about the quality of the investments and is focused on generating stronger cash returns.

FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Nufarm Limited. Sumitomo Chemical Co Ltd is the largest shareholder in the company, with a percentage holding of 15.87%.

 Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During 1H20, gross margin of the company stood at 26.9%, reflecting a slight decline over the previous half. In the same time span, current ratio of the company stood at 1.76x, higher than the industry median of 1.43x. This indicates that the company is liquid enough to pay off its current liabilities using its current assets. During the half-year, debt/equity ratio of the company was 1.05x, and assets/equity ratio of the company stood at 3.21x.

 Key Margins (Source: Refinitiv, Thomson Reuters)

Completion of Sale of South American Businesses: The company has completed the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia and Chile to Sumitomo Chemical Company Limited. This sale is likely to strengthen the balance sheet of the company and will enable the firm to focus on improving cash generation across its businesses.

Half-Year Results: During 1H20, revenue of the company went down by 6% to $1,477 million, and underlying EBITDA of the company stood at $66 million. In the same time span, free cash flow of the company improved by $170 million and the company strengthened its balance sheet following the sale of South American businesses. During the half-year, the company made decent progress against its priorities and experienced increasing demand with the improvement in weather conditions. With the increased earnings from European, Nuseed and North American businesses, the company may distribute increasing returns for shareholders in the coming years. The company continued to simplify its business, optimized its cost base, and continued to progress on its key initiatives to lift its performance.

During the third quarter of FY20, the company saw solid demand for new seed varieties and witnessed an increase in revenues, gross profit, and underlying EBITDA. Despite the impact of difficult weather conditions in key markets and weaker demand due to COVID-19, the company seems to be well positioned to navigate the current uncertainty with a stronger balance sheet and liquidity position. The company retains an attractive scaled platform with an established, global footprint and capability and retains a significant pipeline of opportunities.

1H20 Financial Highlights (Source: Company Reports)

Canadian Regulatory Approvals for Omega-3 Canola: The company has received approvals from the Canadian regulatory authorities for its proprietary Nuseed Omega-3 Canola relating to cultivation, use in aquafeed and livestock feed, and for human consumption. The Canadian Food Inspection Agency confirmed that Nuseed Omega-3 Canola does not possess any environmental risk as compared to other cultivated canola, and hence, is approved for cultivation.

Key Risks: The company is exposed to a variety of risks including the political ambition to reduce the overall use and risk of chemical pesticides, the risks and uncertainties associated with the ongoing impacts of COVID-19 and the global economic environment, climate and seasonality, volatility in commodity prices, foreign exchange risks, risks from grower options and technology, debt financing risk, IP rights and branded names, relationships with channel partners and commercial counterparties, etc.

Future Expectations and Outlook: The company is focused on reducing its cost base and continues to be disciplined in managing working capital. The company is further looking to benefit from upcoming opportunities to reduce costs. NUF seems to be well-positioned to meet increased demand supported by its local manufacturing footprint. The company is also working to strengthen its supply chain processes. It is also dedicated to develop a seeds platform and commercializing omega 3 and is likely to witness positive momentum to pursue the portfolio acquisitions.

Despite resilience during the initial phases of the COVID-19 pandemic, the pandemic may create uncertainties and challenges. With this uncertainty, the customers are not willing to purchase products, and the significant volatility may impact NUF’s financing costs for the second half of the financial year. The company is likely to release its FY20 results on 23 September 2020. The company has decided to change its financial year from 31 July 2020 to 30 September 2020 to align its half year reporting period with its sales period.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company continued to deliver on its strategy and focused on meeting the expectations of its shareholders.  NUF retains a decent balance sheet and ample liquidity to navigate these unprecedented circumstances posed by the global pandemic. As per ASX, the stock of NUF gave a return of 7.75% in the past one month and is inclined towards its 52-weeks’ low level of $3.710, proffering a decent opportunity for accumulation. The company may witness near term uncertainty but seems to be well-capitalized to benefit in the longer term. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target price of low double-digit growth (in percentage terms). Considering the current trading levels, decent returns in the past one month, modest long-term outlook and resilience in the softer market conditions, we recommend a ‘Buy’ rating on the stock at the current market price of $4.300, down by 0.232% on 18 August 2020.

NUF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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