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Stock of the Day - Nufarm Limted (HOLD)

Nufarm (NUF) reportedly had a mixed 1Q15 trading results with improved performance in Asia, Europe, North America, and Seeds Technologies. A little turbulence was witnessed in ANZ and South America. Overall, the trading results outdid the market expectations. Going forward, the seasonal conditions may lead to better 2Q15 results for ANZ and South America on the basis of rain forecast and increasing demand, respectively. There is a scope for improvement through the 2Q and it is also noted that the second half remains a significant period for the Australia business. The review of NUF’s European manufacturing imprint has been expected to be through in 1Q of calendar year 2015. NUF Brazil recently provided first-rate customer service along with competitive prices. In fact, an improvement has been observed with regards to the soybean farmer cash margins owing to 18% rise in local soybean prices since the Company released its FY14 results. The recent Annual General Meeting indicated the advantages of geographic diversification across NUF’s portfolio.


FY14 Headline Results (Source – Company Reports)

The Company believes to have EBIT exceeding pcp in 1H15 and FY15. Growth in each of NUF’s segments would render the 1H15 EBIT target achievable. It is also expected that A$3mn in estimated restructuring benefit may equipoise the dipping volume in Australia. Specifically, NUF has declared A$16mn in cost savings in Australia over FY15 and FY16. This would help the Company equipoise the impact of dry weather in view of an expected 1H15 EBIT of A$10mn. Even with the loss of BASF distribution volume in 1H15, NUF reported only slightly less sales in 1Q15 indicating a relatively better result.

There is recovery sensed from weather extremities for Europe and America. The improvement in Europe and North America may contribute A$5mn of growth. A recovery in the US with slight improvement in plant throughput or overhead recovery along with a new distribution contract will contribute to 1H15 EBIT in the Northern Hemisphere. Earlier, the Company reported a soft 1H14 result owing to the closure of a plant for maintenance and the adverse effect of cold weather in the US. NUF expects positive growth from its expanded product portfolio in cropping, the turf and specialty ornamental segments. There seems to be an inclination towards higher margin segments for Brazil even with lower sales. In spite of the parched conditions in Australia and the phasing effects in China, Seeds sales were marginally up on pcp. There are positive signs with updates such as entering of the first modified canola field trials into an important phase with trials continuing into this year. NUF’s businesses in Asia are slightly ahead of the pcp steered by some new product launches. Corn prices have also gone up 20% but farmers are still facing losses in many areas. Corn acreage in Brazil may decline 10-15%. However, corn is about 10% of NUF’s sales, the earnings risk is not very high. A stable order book is also resulting from Ag chemical import volumes. From future standpoint, irrigated land in northern Australia looks good for sunflower, sorghum and cotton production. The north could produce out-of-season crops for southern Australian markets, and fresh produce markets across Asia. Grain and forage sorghum could also be grown in northern Australia for an expansion of beef, pork and chicken production.


Working Capital (Source – Company Reports)

The Company also expects its working capital to be down on the prior year. Particularly, the working capital at 1H15 balance date may be above FY14 owing to seasonality but is expected to be below pcp. NUF further aims to emphasize on operating efficiencies across manufacturing, the supply chain, and procurement. Given the status of the balance sheet, a net debt to EBITDA ratio is indicated to remain below 3x at 1H15 while completing the year at 1.5x. At 12x FY15, the Company is trading at 16% PE discount to global peers.


Regional Summary (Source – Company Reports)

In view of the fact that South America market is at maximum risk of falling soft commodity prices, NUF is trying to lessen risks by evaluating its credit exposures. The credit limits have been stiffened and enforced for less creditworthy customers.

Some game-changers to be wary of entail competition, seasonal conditions, high gearing levels, customer product sourcing strategies, waning commodity prices, and any impact from loss of BASF and Roundup contracts. Out of these, seasonal conditions are capable of adversely affecting demand for crop protection products, and in a way, essentially affecting the earnings.


Nufarm Daily Chart (Source - Thomson Reuters)

Based on the above, we reiterate a HOLD recommendation for this stock at the current price of $5.64.