Stock of the Day - Nufarm Limited (SELL)


Nufarm (NUF) announced for implementation of a $100m cost-cutting program over the next 2-3 years by virtue of which the Company aims to optimize manufacturing, improve procurement & supply chain, and review its European operations among various other activities. The latest announcement of cost savings for €16mn (A$23mn) under the European restructure entails closing of the Netherlands plant and upscaling two other plants in UK and France. There is not much information about this although. The key focus remains working capital reduction and $244m of 1H working capital build is expected as opposed to last year’s $321m. Nevertheless, the target of average net working capital/sales of 40% by the end of FY16 needs a lot of efforts.


Ongoing Commitment for Improvements (Source – Company Reports)

The Company intends to take A$44mn in restructuring charges during 2H15. The 18-month timeline for Europe may be achievable given the fact that re-registration is not an issue as the UK plant produces the same chemical as that produced at the Netherlands. Then, Australia plant closure is on track. The Queensland, Australia and Otahuhu, New Zealand sites are due by the end of FY16. EBITDA benefit of about A$25mn is expected to be running through the next three years.

The Company expects to have 1H and full-year growth which may emanate from Brazil although lower than previous years. Seasonal conditions in North America along with better performance in Asia may further contribute. There is slight positive sentiment with regards to farmers in Australia in view of rainfall in the past few weeks which indicates improvement in 2H. The earnings are nonetheless expected to be skewed in view of winter plant in Australia and spring plant in North America and Europe.

NUF is also looking for a new CEO after the stepping down of Doug Rathbone who has been with the Company for many years in the CEO role. Greg Hunt who has been the head of Commercial operations, is appointed as Chief Operating Officer and is also the acting CEO. Doug Rathbone’s efforts have improved the balance sheet of the Company with strong growth witnessed in Latin America. Therefore, some level of uncertainty prevails with regards to future management operations.

The Company recently reiterated the previously stated guidance for 1H15 with underlying EBIT to be ahead of pcp. Other details remained the same with the Australian business’ performance to be weaker in 1Q15. There was a good start for North America with sales, margin and EBIT in 1Q15 ahead of pcp. Even, European sales in 1Q15 were slightly ahead of the pcp. South American 1Q15 sales dipped on pcp. NUF has cautioned that earnings will be heavily weighted to 2H owing to delays in securing import approvals for Nuseed’s confectionary sunflower seeds into China. Then soft commodity prices, specially, the crop prices, are not favorable. More clarity is expected in half-year results due for March 2015.


Strategic Priorities (Source – Company Reports)

The stock appears to be of relatively fair value in view of efficiency improvement announcements and competitive position. These aspects given other above-mentioned turbulences may not provide great confidence to growth presently. The upside potential looks limited in view of the uncertainty revolving around the near term with regards to management succession, and strategy and effect of cost reduction efforts. The exposure to unpredictable weather conditions is also a concern. It is to be noted that the Company has limited pricing power in some of the contracts given the competitiveness of the global crop protection market. The recent efforts in cost-reduction may help NUF in reducing the debt (net debt to equity of 56% as at 31 July 2014) which is otherwise quite high for a company with cyclical earnings. Nonetheless, a stark improvement in performance is likely not probable in the near future.


NUF Daily Chart (Source - Thomson Reuters)

Accordingly, we put a SELL recommendation for the stock at the current price of $6.00.