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Morningstar | Another Climactic Downgrade for Nufarm Crimps Earnings but Not Our AUD 7.00 FVE

Nufarm has announced a second, but this time far sharper, fiscal 2018 EBIT guidance downgrade to AUD 255 million-AUD 270 million from its prior AUD 317 million estimate. The market has vented frustration, with shares down 11% to AUD 7.50 on the day, and down 20% from AUD 9.45 highs in May. The share are now only 7% above our unchanged AUD 7.00 fair value estimate.

The downgrade includes EBIT of just AUD 5.0 million-AUD 10.0 million for the ANZ segment, down from AUD 52 million in fiscal 2017. That equates to negligible second-half ANZ EBIT, given that the first half generated AUD 6.5 million. One of the driest Australian autumns in over a century has led to a very poor winter crop season, with increased competition and high inventory levels pressuring margins. Further, a consequent substantial overhang of inventory in the system, along with an El Nino watch and the Australian Bureau of Meteorology’s forecast for a dry spring, means sales and margins are also expected to be constrained into fiscal 2019.

We downgrade our fiscal 2018 group EBIT forecast by 20% to AUD 246 million, though including AUD 14 million in first-half foreign exchange expense. On a like-for-like basis excluding foreign exchange, our EBIT forecast sits at a mid-guidance range of AUD 260 million. We cut our fiscal 2018 and fiscal 2019 EPS forecasts by 30% and 5% to AUD 0.29 and AUD 0.58, respectively, but our AUD 7.00 group fair value estimate stands, with the downgrade’s drivers cyclical in nature only, and their minor impact offset by time-value-of-money considerations. Despite the drought conditions, Nufarm is confident it has retained its market share in Australia.

We think Nufarm shares remain marginally overvalued, with the implied nominal 3.8% unfranked yield by fiscal 2022 too low. Our fair value estimate equates to an unchanged fiscal 2022 enterprise value/EBITDA of 6.3, and PE and dividend yield of 11.6 and 2.6%, respectively, all discounted at the weighted average cost of capital.