Nufarm Limited

Balance Sheet to Improve Further: Nufarm Limited (ASX: NUF) is engaged in the manufacturing and sale of the crop protection products and its proprietary seed technologies business with total employees of ~3,200 people at its various locations in Australasia, Africa, the Americas and Europe. Head office of the company is located at Laverton in Melbourne.

The company notified that Macquarie Group Limited and its controlled bodies corporate became a substantial holder of the company with the voting rights of 5.08%. United Super Pty Ltd was also reported as an initial substantial holder of NUF, holding voting rights of 5.07%.

Glyphosate Update: The company recently released an update related to Glyphosate following three substantial jury verdicts in US courts against Monsanto in the period since August 2018. Bayer (Monsanto) disclosed that more than 13,000 claims are pending against it in relation to glyphosate. NUF is not a glyphosate manufacturer, but it purchases glyphosate material from these manufacturers to formulate into glyphosate-based products for sale.

Nufarm believes that glyphosate is safe to usein accordance with label directions, including the appropriate safety directives as outlined in each product label.

However, as a supplier of glyphosate-based herbicides, the company is exposed to litigation risk. NUF also noted that the regulators in major markets had reiterated the safety and registration of glyphosate-based products in the very recent past.

Key Highlights of Macquarie Australia Conference 2019:

1. The company expressed that the outlook provided in March is intact.
2. Dry season in Australia will lead to lower sales and unrecovered overheads in FY19.
3. The Management is tracking its working capital very closely which is on track to meet the target for FY19.
4. Balance Sheet leverage is expected to fall below threefor the year end, and in the next few years, the management is further targeting to reduce it to the target range of an average of 2.
5. The company is planting its first commercial crop in North America with harvest expected around September and October.
6. The company is heading towards its first commercial sales of Omega-3 canola oil, which is expected in FY20 and will positively impact EBITDA in FY21.
7. Performance improvement program in Australia is expected to deliver $10 million - $15 million additional earnings over the next 1-2 years.
8. In FY20, the company expects earnings recovery from Australia and Europe, which will uplift cash flows.

Strong 1H19 Results in America Offset by Australia and Europe: Top-line witnessed an increase of 8% to $1.58 billionas compared to $1.46 billion in 1H18, broadly on the back of decent sales growth in North America and Latin America. European and Asian sales saw strong growth with higher revenues from seed technologies segment. However, the Australian business was unfavourably affected by continued dry conditions.


1H19 Financial Performance (Source: Company Reports)
 
Underlying EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) saw a decline of approximately 2% to $120.9 million. Underlying EBIT (Earnings Before Interest and Tax) stood at $38.9 million as compared to $74.9 million, which included a first-time impact of amortisation costs with respect to the acquisition of the European portfolios last year. Underlying NPAT (net profit after tax), ex amortisation effect, came in at $7.3 million against $10.7 million in 1H18, however, slipped into losses of $11.5 million, incl. amortisation impact.

Outlook: With the effect of the continued dry weather in Australia, sluggish beginning of the season in Europe in the 1H and the supply issues with the acquired portfolios, the Management expects EBITDA for FY19 to be in the range of $440 million to $470 million. Net interest expense is likely to be ~$105 million, with the guidance for forex effect of $15 million to $20 million, assuming $1 million-$1.5 million per month of hedging cost for Latin America in 2H19.

The company will remain its focus to maintain the balance sheet. Net working capital (NWC) balance at 31 July 2019 is forecasted to be in a range of $1.3 billion to $1.4 billion as compared to $1.325 billion at July 2018. The reduction in working capital is expected to be achieved through collections in 2H19 and inventories, to be turned into sales, in the upcoming major seasonal demand periods. The estimated NWC will allow a deleveraging of the balance sheet at the end of July 2019.

Stock Recommendation: At the current market price of $4.080, market capitalization comes in at $1.57 billion. The stock has fallen 27.01% in the last 6-months. The management has maintained its focus towards streamlining the working capital and retain the strengthening of the balance sheet. The company believes to achieve the given FY19 guidance, however, reminded the dry season in Australia to unfavourably impact the sales figure in FY19. Coming to the other factors, the company’s annual dividend yield stood at 2.70% and the company’s stock price is trading slightly towards its 52-week lower levels of $3.605.

With expected lower leverage on the FY19 balance sheet, expected commercial sales of Omega-3 canola oil in FY20, expected earnings recovery from Australia and Europe in FY20 and other factors, we recommend to “Hold” the stock at the current market price of $4.080 per share (down 1.211% on 21 June 2019).

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