Company Overview: Nufarm Limited (ASX: NUF) is engaged in the manufacture and sale of crop protection products. It has its operations spread out in Australasia, Africa, America, and Europe. The Group also operates in the seed technologies vertical, which deals in the sale of seeds and seed treatment products.

NUF Details

Improvement in Performance Owing to Growth in Volumes & Better Product Mix: The company has decided to change its financial year-end to September in order to align the business reporting periods with its peak sales cycle and enable improved comparison with its industry peers.

Growth in Key Business Verticals:

The company reported improved performance during the H1FY21 period across most of its key business segments on the back of higher volumes and improved product mix.

• APAC: The company has witnessed growth in this region, owing to decent commodity prices, improved conditions and also aided by early demand and restocking of supply channels.
• Revenue grew by ~24% to ~$434 million in H1FY21, compared to revenue of ~$348 million in proforma H1FY20.
• Performance in ANZ driven by new products that include Crucial, Saracen and Terrador and increased sales of Croplands spraying equipment.
• Prudent cost savings approach has contributed to earnings.
• Europe: The company has reported differentiated product volumes, lower cost of goods sold and reduced cost base from the region during H1FY21 period.
• NUF has witnessed growth in sales performance in Germany, UK, and Eastern Europe.
• It reported a contribution of ~$7 million from the Performance Improvement Program during the period.
• Underlying EBITDA increased by ~134% to ~EUR 75 million in H1FY21, when compared to the proforma pcp.
• North America: NUF reported revenue and earnings growth across all regional segments in the region.
• Volume has been driven by improvement in corn and soy prices.
• Revenue grew by ~14% to ~US$389 million in H1FY21, compared to the proforma pcp.

A look into the H1FY21 Financial Performance:

• The company reported an improvement in the revenues by ~20% to $1,649.64 million in H1FY21, when compared to the proforma 6 months period ended 31 March 2020.
• Underlying EBITDA stood at $233.62 million in H1FY21, compared to $107.26 million in the proforma pcp.
• NPAT stood at $58.89 million in H1FY21.
• There has been an improvement in the gross profit margin to 29%, driven by higher margins in Europe and APAC regions.
• The cash position stood at $500.67 million as of 31 March 2021, reflecting an increase from $423.91 million as of 30 September 2020.

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

Strong Performance from Seed Technologies: The company reported decent performance from its core seeds portfolio and delivered growth in canola sales. It also witnessed increased sales in & sunflower hybrids in USA & South America. The revenue grew by ~37% to $144 million in H1FY21, compared to ~$105 million in the proforma pcp period.

Top 10 Shareholders: The top 10 shareholders together form around 59.61% 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 9.78%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improved gross margin at 28% in H1FY21, compared to an industry median of 25.4%. Net margin stood at 3.6% during the period. It posted an uptick in the asset turnover to 0.38x in H1FY21, compared to 0.15x in H1FY20 period ended 31 January 2020. There was also an improvement in the current ratio to 1.90x as of H1FY21 period end, from a level of 1.76x as of 31 January 2020.

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

Key Risks: The company is exposed to the following risk factors:

• Distribution Risk: The company is dependent on its third-party distributors and sellers for successful sales of its products. Any adverse impact on the relationships or a third party deciding not to renew its contracts, might pose a risk of profitability to NUF.
• Stiff Competition: The company is prone to stiff competition from other related peers in the sector, who might come up with better cost-effective products.
• Foreign Currency Headwinds: NUF has presence in different geographies, and this gives rise to the risk of currency volatility.

Outlook: The company will look to increase its market share in crops and remain focused on delivering returns to its shareholders. It will also look to optimise its product portfolio and generate sales skewed to a more profitable product mix. It expects FY21 capex to be below the previously guided amount of ~$180 million and anticipates lower interest costs in the range of $55 - $60 million.

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: As per a recent update, Allan Gray Australia Pty Ltd and its related bodies have undergone a change of substantial interests in the company and has increased its voting power from 8.65% to 9.78%. 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 ~15.30% in the past nine months and a negative return of ~13.29% 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 some discount to its peer median EV/EBITDA (NTM trading multiple), considering the cyclical nature of the business, the prevalence of COVID-19 pandemic and lower net margin compared to the industry median. For this purpose, we have taken peers such as Incitec Pivot Ltd (ASX: IPL), Orica Ltd (ASX: ORI), Orora Ltd (ASX: ORA), to name a few. Considering the expected upside in valuation and current trading levels, improvement in performance in H1FY21, rise in cash position, increase in volumes, better product mix and expected decrease in interest costs, we recommend a ‘Buy’ rating on the stock at the current market price of $4.340, as on 10 August 2021, 11:45 AM (GMT+10), Sydney, Eastern Australia.

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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