After some difficult and trying seasons, Nufarm ((NUF)) is having a much better time, with growth reported over the four months to January 31 from all regions. The business is benefiting from a strong recovery in global agriculture amid favourable weather and crop prices, particularly soy and corn, which UBS points out are up around 50% over the past four months.
Group revenue has increased over the period by 17% and represents 52% of the first half revenue. In the four months, Asia-Pacific revenue was up 46% and Europe up 18%. Morgan Stanley notes revenue has been supported by a strong summer crop locally and weak comparables, forecasting 12% revenue growth in the first half.
Tight global supply underpins the crop pricing outlook while demand fundamentals have increased the level of profitability at the farm level and boosted grower sentiment, Macquarie observes. The demand for crops is helped by record Chinese grain and oilseed imports. In Australia, wetter-than-average conditions are largely expected across the east coast over the winter.
Macquarie has upgraded the stock to Outperform to reflect positive earnings changes and expectations for a firm first half result in May. While La Nina has likely passed its peak for Asia-Pacific the impact is expected to continue through autumn.
Europe Recovery
This is the third consecutive positive trading update and UBS, in lifting forecasts, is particularly pleased by the European outlook given its recent underperformance.
The improvement in Europe is a strong positive development, although Macquarie warns this needs to be sustained and it remains early in the year for that region. Easing raw material costs are helping reinstate profit in Europe and the broker forecast $24m in European earnings (EBIT) in FY21 compared with the loss of -$23m in FY20, albeit still below the $44m achieved in FY19.
Citi suspects its numbers could be conservative, given the upside risk that is emerging in Europe. February-March is a large period for orders ahead of the planting of the spring crop in Europe and the broker’s current forecasts imply just $206m in sales versus the $224m from the prior corresponding period. Hence the upside risk.
In Asia-Pacific, industry feedback suggests tight supply and good prices amid shipping and logistical delays out of China. Again, the broker believes its first half forecast for sales growth of 6% could be conservative.
Yet Credit Suisse stresses that the remaining two months of the first half account for 40-50% of sales for the whole period, and most of the profit. The broker notes there was no information about margins in the update but the cost pressure appears to have passed, downgrading to Neutral on the positive reaction and finding it unsurprising Asia-Pacific has been strong as seasonal conditions have been well above average.
US
In the US, the emergence of a the “polar vortex” in early February over much of the key crop regions has meant a delay to purchases by customers, and this presents the main downside risk to Citi’s implied 10% sales growth forecast.
Credit Suisse reduces North American earnings estimates because of FX assumptions and Macquarie, too, envisages limited growth in North America because of the higher Australian dollar and competitive market conditions.
Value?
UBS considers the stock at an attractive 1-year forward enterprise value/operating earnings ratio of around 6x. This represents a -28% discount to global crop protection peers compared to a typical through-the-cycle discount of -13%. Hence, the broker suggests an attractive opportunity exists to gain leverage to a recovery in global agriculture.
Yet, it all depends on the comparison numbers, as Macquarie notes Nufarm is trading at a large premium to global peers on an estimated FY22 price/earnings ratio at 20x, although these peers are generally patented agricultural chemical participants compared with Nufarm which is a generic agricultural chemical company.
Size and relative earnings growth are also necessary considerations along with the long-dated Omega 3 potential. Credit Suisse notes there was no update on Omega 3 canola, although does not consider the absence of any news at this juncture of major importance.
FNArena’s database has five Buy ratings and two Hold. The consensus target is $5.20, signalling 6.3% upside to the last share price.
