Nufarm Limited

NUF Details 

Robust Growth Across All Regions: Nufarm Limited (ASX: NUF) is a developer and manufacturer of crop protection solutions and seed technologies. It is worth mentioning that post the divestment of the South American crop protection businesses on 1 April 2020, NUF changed its financial year-end for the 6 months ended 31 March 2021, in order to better support reporting periods with important sales periods and permit enhanced comparison with industry peers. NUF has registered robust growth in its crop protection business across all the regions in 1HFY21. North America has registered a revenue growth of $517.75mn in 1HFY21 against $504.62mn in 1HFY20. Whereas, Europe has posted $478.18mn of revenue in 1HFY21 against $416.03mn in 1HFY20. APAC region has registered $433.55mn of revenue in 1HFY21 against $348.32mn in 1HFY20. Europe region has registered a turnaround with EBIT at $58.41mn in 1HFY21 against -$7.95mn in 1HFY20.

Region-Wise Performance (Source: Company Reports) 

1HFY21 Financial Highlights: The company has registered an increase in revenue to $1,649.64mn in 1HFY21 against $1,374.28mn in 1HFY20 on the back of higher commodity prices and an improved seasonal condition. The company has posted an increase in EBITDA to $233.62mn in 1HFY21 against $107.26mn in 1HFY20 on the back of reduced costs and decline in forex losses. Cash on the balance sheet increased to $500.67mn as on 31 March 2021 against $423.91mn as on 30 September 2020.

Revenue Growth (Source: Company Reports)

Key Risks: The company is exposed to liquidity risk. The company’s financials may be impacted due to a lack of liquidity to pay off its debt. The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: NUF expects strong demand for its products, mainly from APAC and Europe region. NUF expects its net external interest costs to be in a range of $55mn-$60mn (at AUD/USD – 76 cents) in FY21. NUF expects lower capital expenditure to $180mn for full FY21. Depreciation and Amortisation is likely to be at ~$210mn for FY21. 

Valuation Methodology: EV/EBITDA based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, 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 stock of NUF gave a return of ~-2.50% in the last one month and a return of ~10.02% in the last three months. The current market capitalisation of NUF stands at ~$1.85bn as of 20 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$3.370-~$5.770. On the technical analysis front, the stock has a support level of ~$4.667 and a resistance of ~$5.751. We have valued the stock using an EV/EBITDA Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering an increase in total liabilities as on 31 March 2021 and increased supply chain and freight costs in 1HFY21. For this purpose, we have taken Incitec Pivot Ltd (ASX: IPL), Salt Lake Potash Ltd (ASX: SO4), Scidev Ltd (ASX: SDV). Considering an increase in revenue across all regions, turnaround in EBIT for Europe region, expectation of strong product demand mainly from APAC and Europe, reducing operational costs, current trading levels, and valuation, we recommend a “Hold” rating on the stock at the current market price of $5.05, up by ~3.271% as on 20 May 2021.

NUF Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Australian Agricultural Company Limited

AAC Details

Lower Volumes Offset by Cost Optimisation: Australian Agricultural Company Limited (ASX: AAC) is a cattle and beef producer in Australia. The primary activities include ownership, operation, and development of pastoral properties; production of beef, including breeding, backgrounding, feed lotting and processing of cattle, and sales and marketing of branded beef. AAC has witnessed lower cattle sales and meat production volumes on the back of lower demand. AAC undertook cost optimising steps to offset the effect of lower volumes and revenue in FY21. The cost of production decreased by 12% in FY21, and an increase of 8% in the average meat sales price per kg resulted in better operating margins and higher net profits in FY21. 

FY21 Financial Highlights: The company has registered a decline in total sales to $265.52mn in FY21 against $334.14mn in FY20 due to demand impacted by Covid-19 situation. Despite a decline in total sales, AAC has posted a NPAT of $45.47mn in FY21 against $31.31mn in FY20 on the back of optimising cost. AAC has seen a decline in its liquidity position with cash at $8.87mn as on 31 March 2021 against $18.12mn as on 31 March 2020. 

Financial Performance (Source: Company Reports)

Key Risks: The company may see an impact on its profit margins with an increase in commodity prices such as feedlot inputs etc. The company is likely to see a decline in its volume on adverse climatic conditions such as drought, floods etc.

Outlook: In a medium-term, AAC is looking to optimise its supply chain. Moreover, AAC has plans to implement a differentiated branding strategy and investing in innovation and technology, going forward. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, 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 stock of AAC gave a return of ~6.60% in the last one month and a return of ~5.21% in the last three months. The current market capitalisation of AAC stands at ~$735.37mn as of 20 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$1.010-~$1.240. On the technical analysis front, the stock has a support level of ~$1.127 and a resistance of ~$1.33. We have valued the stock using an EV/Sales Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount as compared to its peer average, considering a decline in total sales in FY21 and cash balance as on 31 March 2021 and declining volumes due to Covid-19 impacts. For this purpose, we have taken peers Inghams Group Ltd (ASX: ING), Murray Cod Australia Ltd (ASX: MCA), Wingara AG Ltd (ASX: WNR) to name a few. Considering an increase in NPAT in FY21, an increase in average meat prices, cost optimisation, associated business risks, current trading levels, and valuation, we recommend a “Hold” rating on the stock at the current market price of $1.21, down by ~0.82% as on 20 May 2021.

AAC Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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