Company Overview: Nufarm Limited (ASX: NUF) is engaged in the manufacture and sale of crop protection products. The company also has its proprietary seed technologies business. It employs ~2,700 people at its locations in Australasia, Africa, the Americas and Europe. It is headquartered at Laverton in Melbourne.

NUF Details

Decent Performance Aided by Prudent Cost Saving Approach: Nufarm Limited (ASX: NUF) is a marketer and manufacturer of chemicals. The market capitalisation of the company as on 06 July 2021, stood at ~$1.70 billion. During H1FY21, the company reported decent performance with a substantial improvement in the Group revenues to $1.65 billion, reflecting an increase of 20% on the previous corresponding period. EBITDA grew by ~118% to $233.6 million during the period. The NPAT was at ~$59 million. The performance has been aided by strong early demand and channel restocking in key markets. The APAC business has been tracking well to improved seasonal conditions and the company has also seen an earnings recovery in its European business unit.

Trend in Cash Balance (Source: Analysis by Kalkine Group)

Decent Segment Performance in 1HFY21: The company reported decent performance in the APAC region with higher volumes and improved product mix supported by improved conditions and high commodity prices. It has witnessed high early demand driven by the restocking of supply channels. Revenues grew by ~24% to ~$434 million in H1FY21, compared to the previous corresponding proforma FY20 period. EBITDA grew by ~107% to ~$68 million in the same period under consideration.

In the European market, the company reported decent product sales performance in Germany, UK & Eastern Europe. It has witnessed higher gross margins on the back of improved product mix and better conversion costs. It also reported revenue and earnings growth from the operations in the North American region owing to improved market conditions and decent corn and soy prices. NUF has reported revenue and margin growth from its core seeds portfolio in H1FY21.

Performance Improvement Program (PIP): The company is focused on following a prudent cost management approach and has delivered PIP impact of ~$10 million in H1FY21. In this regard, it has reduced salary, occupancy & warehousing by ~$7 million in Europe. It expects a full-year run-rate of ~$25 million by the end of FY21 period. Lower SG&A was also aided by favourable currency translation. There has been an increase in early-stage R&D expense, reflecting its investment in its research program. The SG&A expense stood at $335.52 million during H1FY21, compared to $360.07 million in the previous corresponding period, reflecting a decrease of ~7%.

Decent Balance Sheet & Improvement in Cash Flow Position: NUF has been able to decrease its leverage and posted net debt at ~$390 million and ~$136 million in lease liabilities as of 31 March 2021, compared to ~$1,247 million in net debt as of July 2019. The sale of the South American businesses led to a reduction in the net debt position of the company. It has also reported an improvement in the cash flow performance in H1FY21 and delivered an underlying operating cash flow of $62.51 million, compared to a cash outflow of $187.60 million in the half-year ended 31 January 2020. The underlying free cash flow stood at $8.54 million in H1FY21 period.

Top 10 Shareholders: The top 10 shareholders together form around 58.48% of the total shareholding, while the top 4 constitute the maximum holding. Sumitomo Chemical Co Ltd and Allan Gray Australia Pty Ltd are holding a maximum stake in the company at 15.87% and 8.65%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During H1FY21, the company reported an improvement in the margin performance with gross margin of 28%, compared to 26.9% in the prior corresponding period. Net margin stood at 3.6% in H1FY21, compared to a negative 17.7% in H1FY20. There has been an improvement in the liquidity with current ratio at 1.90x, from a level of 1.76x in the pcp. The debt to equity ratio stood at 0.56x in H1FY21. It ended the period with a total debt of $1,027.1 million, which comprises a long-term debt of $744.6 million and a short term debt of $282.5 million as of 31 March 2021.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company’s line of business exposes it to credit risk, liquidity risk and market risk. It has operations in different geographies and is prone to default risk by clients in regard to the trade receivables. In this regard, it has robust credit policies in place, and the credit risk is monitored on a regular basis. The Group is also exposed to foreign currency risk due to its presence of operation in different geographies. The onset of COVID-19 has impacted some niche market segments and impacted demand in some niche markets.

Change in Financial Year End: The company has decided to change its financial year from year ending 31 July to 30 September, in view to align its reporting periods with its key sales periods. This will enable improved comparison with its industry peers.

Outlook: The company is focused on generating cash and returns to deliver value to its shareholders. It will look for improvements in working capital and margin performance with a favourable product mix going forward. It anticipates full-year capex to be below the previously guided amount of ~$180 million in FY21 and expects lower interest costs in the range of $55 million to $60 million. Notwithstanding the COVID-19 impact, the medium and short term global salmon demand outlook seems to be positive.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company has recently appointed Dr David Jones as an Independent Non-Executive Director to the Nufarm Board, effective from 23 June 2021. As per ASX, the stock of NUF is trading below its average 52-weeks’ levels of $3.370-$5.600. The stock of NUF gave a positive return of ~12.56% in the past one year and a negative return of ~13.00% in the past three months. We have valued the stock using an EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer median EV/EBITDA (NTM trading multiple), considering the impact of COVID-19 and exposure to climate risks, etc. For this purpose, we have taken peers such as Incitec Pivot Ltd (ASX: IPL), Orica Ltd (ASX: ORI), etc., to name a few, which comes under the chemical sector. Considering the expected upside in valuation and current trading levels, decent performance in H1FY21 in all the key regions, improvement in operating cash flow and prudent cost management approach, we recommend a ‘Buy’ rating on the stock at the current market price of $4.47, down by 0.446% as on 06 July 2021.

NUF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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