Agricultural chemicals supplier Nufarm is in trouble after its shares plunged 28% in trading yesterday after Wednesday’s profit warning shock, and the news yesterday that it had breached a loan covenant.
The shares were absolutely pummelled by worried investors.
They fell 28% to a low of $3.72 and fell again to close at $3.75, a loss of $1.49 on the day as the advice on the banking covenant breach added to the disbelief about the previous day’s earnings downgrade.
It was the lowest Nufarm shares have been since April, 2003.
Nufarm said in the statement yesterday that it would not achieve an existing borrowing covenant by a small margin and that as a result the company was in talks with its lenders seeking a temporary adjustment.
The company said it has an earnings before interest, tax, depreciation and amortisation to net interest covenant ratio which it will not be able to keep at July 31, the end of its fiscal year.
‘‘Nufarm has bilateral banking arrangements with a number of providers and has commenced discussions with those lenders to seek a temporary adjustment to the interest cover ratio,’’ Nufarm said.
Nufarm said it would remain in compliance with its net debt to equity (gearing) and net debt to EBITDA covenant ratios.
Nufarm said it expects to generate a net operating profit, which excludes material items, of between $55 million and $65 million, compared to its previous guidance for an operating profit of $110 million to $130 million.
Just why it couldn’t work out that it was in breach the day before is a little strange.
But those shareholders who managed to sell into the 20% purchase by Sumitomo of Japan must be feeling good, while those shareholders who remain must be wondering why the company didn’t take the ‘cheap’ offer of $12 a share from Sinochem in late 2009.
Sumitomo was rounded up as a white knight and it has ended up paying well over the odds for that 20% stake in the company, which was done at $14 a share.
The Australian’s John Durie summed up the Nufarm story when he wrote yesterday:
"AFTER five profit downgrades in 18 months, Nufarm boss Doug Rathbone’s credibility clearly lies in tatters."
The 5th and latest profit downgrade was shocking, coming so soon after the company raised $250 million at $5.75 a share.
Nufarm has slashed its full-year earnings guidance in half, blaming adverse weather for a final-quarter result expected to fall well short of expectations.
In what was the company’s fifth profit downgrade in a row, Nufarm said it expected full-year net operating profit, excluding material items, to be between $55 million and $65 million, compared with between $110 million and $130 million as forecast at the company’s half-year results in March.
Nufarm said unfavourable weather contributed to poor demand for its crop protection products, which in turn led to increased competition and price pressure.
The 50% profit downgrade came just four months after the last one was made.
Mr Rathbone said the extent to which guidance was missed was ”cause for real concern”, and that the company will take ”a very close look” at its forecast and information systems.
Wednesday’s announcement follows Tuesday’s sudden resignation of long-standing chairman Kerry Hoggard, who cited poor health.
He was replaced by former Telstra chairman, Donald McGauchie (and former James Hardie director), who said he will review the strategic direction of the company.
Nufarm blamed a late, cold winter in North America and Europe for hitting demand for its main weed killer product.
The company also raised its forecast for net debt by about one-third to $450 million for the year to July 31, 2010, which was another shock for the market.
Chief Financial Officer Kevin Martin said the company was confident it could roll over A$300 million in debt due for refinancing over the next six months.
"Unfavourable climactic conditions — particularly in North America and Europe — have contributed to poor demand for crop protection products," Nufarm said.
It said the business was further hit as new competition for fewer sales hit prices and margins in key markets.
In Australia, it said it had been able to raise prices, but by much less than it had expected.
The main problem in the glyphosate business is that the biggest producer, US seed and chemical giant Monsanto had said in May that it would cut prices of its Roundup product, to try and protect its sales against generic competition.
Farmers are turning to generics to lower costs as they find finance difficult to come by.
Nufarm has the rights to sell Roundup in Australia and sells a generic competitor in the United States.
That are also cutting the use of fertiliser or using cheaper unbranded products, a move that has hurt the earnings of another Australian agri group, Incitec Pivot.
Nufarm reported a first-half loss in March and said then it was counting on a second-half recovery in sales of glyphosate.
That clearly hasn’t happened.
