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 develop, manufacture, and sell crop safety 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 manufacture and sale of crop protection products and its proprietary seed technologies business. As on 13 October 2020, the market capitalization of the company stood at ~$1.49 billion. NUF has a large scale and global distribution footprint, making it an attractive partner for major manufacturers and research organizations. NUF has made significant investments during the year and is likely to benefit from earnings along with continued improvement in its Australian business. The company is also working on improving its product quality.
Despite the softer market conditions, the company saw a decent momentum in all regions and businesses in the second half except Europe. Notably, revenues of the company went up by 7% to $2.85 billion. However, this is excluding the zero margin sales to Sumitomo under the transitional services agreement for procurement services to the South American businesses. During the year, higher profits in ANZ, Asia and Seed Technologies were offset with a decline in Europe and North America and resulted in a decline of 4% in underlying gross profit to $735 million. During FY20, underlying net operating cash flow from continuing operations increased by $137 million to $217 million, primarily due to improved working capital management, offsetting the impact of reduced earnings.
The group’s financial position has been strengthened post the divestment of the South American businesses. Net proceeds from the sale were used to reduce its debt to $441 million from $1,247 million in FY19. During the year, group leverage went down from 3.0x to 1.5x, excluding lease liabilities and 1.9x, including lease liabilities. The reduced leverage will enable the company to manage the inherent industry volatility and withstand a range of uncertain scenarios. The company has decided to change its financial year-end to 30 September from 31 July to align half year periods with key sales periods and enables improved comparison with industry peers.
In September 2020, the company secured the first commercial sales and forward orders of proprietary omega-3 canola oil to a major global salmon producer, marking the beginning of a new phase in the delivery of shareholder value from Nuseed’s Beyond YieldTM growth platform. Despite the uncertain economic outlook, the company supported its customers and saw a limited impact in agricultural markets.
Key Financial Metrics (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)
Healthy Balance Sheet and Decent Liquidity: During FY20, assets/equity ratio of the company witnessed an improvement over the previous year and stood at 2.39x, down from 2.76x, and debt/equity ratio went down from 0.85x in FY19 to 0.59x in FY20. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. During FY20, gross margin of the company stood at 25.8%, as compared to the industry median of 38.1%. In the same time span, EBITDA margin of the company was 9.3%. During the year, current ratio of the company stood at 1.96x, higher than the industry median of 1.28x. This shows that the company is in a decent liquidity position and can pay off its current liabilities using its current assets.
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. The company also terminated its manufacture of insecticides and fungicides at its Raymond Road site and curbed herbicide manufacturing to build a stronger and resilient business. NUF expects the combined initiatives to deliver an annual improvement of up to $15 million per annum in EBITDA, once fully implemented.
Performance by Regions: In Australia and New Zealand, the company reported a strong second half with higher volumes and an estimated contribution of $10 million from the performance improvement program. This lifted revenues by 24% and underlying EBITDA by 88%. The company may launch new products in FY21, which will support growth in earnings. In the same time span, Asia segment reported a strong performance in the second half and elevated its inventory levels. It also reported an increase of 10% in revenue, with an improvement in seasonal conditions and continued momentum from recent product launches. The company will combine the ANZ region with Asia to create APAC region from October 2020 to deliver efficiencies in supply chain and manufacturing capabilities and create portfolio marketing and development opportunities. The North America region witnessed an impact on its operational and financial performance because of strong competition and extreme weather conditions. However, the company is likely to witness the benefits of Greenville formulation facility.
Regional Performance of Asia (Source: Company Reports)
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. Further, 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 adds to the woes.
Future Expectations and Outlook: The company is focused on reducing its overall cost structure and continues to be disciplined in managing working capital. The company is further looking to benefit from upcoming opportunities to decrease expenditures. 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 in developing 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 virus may create uncertainties and challenges.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales 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 healthy balance sheet and ample liquidity to navigate these unprecedented circumstances posed by the global pandemic. The stock of NUF is inclined towards its 52-weeks’ low level of $3.710, proffering a decent opportunity for accumulation. The stock may witness near term uncertainty but seems to be well-funded to benefit in the longer term. On a technical front, the stock of NUF has a support level of ~$3.758 and a resistance level of ~$4.514. We have valued the stock using an EV/Sales multiple based illustrative relative valuation and have arrived at a target price of low double-digit upside (in percentage terms). Considering the current trading levels, 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 $3.950 on 13 October 2020.
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NUF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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