EUR 850.00 For Business Accounts Only

Morningstar | Market Vents on 1H Working Capital Build for Nufarm; Our AUD 7 FVE Stands

We make no change to our AUD 7 fair value estimate for no-moat Nufarm. The company reported a deterioration in underlying first-half fiscal 2019 NPAT to negative AUD 11.5 million, down from positive AUD 12.0 million in the prior corresponding period. This is only slightly worse than our negative AUD 5.0 million expectation, with Nufarm’s earnings seasonally skewed to the fiscal second half. Higher-than-expected European depreciation accounts for the slight profit miss, with amortisation related to European acquisitions. Group EBITDA increased 5% to an expected AUD 115 million.

Despite this, Nufarm disappointingly lowered its fiscal 2019 underlying EBITDA forecast by AUD 60 million, or 12%, to AUD 440 million-470 million from AUD 500 million-530 million. Our prior AUD 490 million forecast was already below the low end of guidance, so we reduced this by AUD 40 million, or 8%, to a slightly sub-mid-range AUD 450 million. This anticipates continued deterioration of conditions in Australia leading to lower production levels and ongoing uncertainty around supply in the acquired European portfolios. Our fiscal 2019 EPS forecast declines 28% to AUD 0.33 from AUD 0.46.

Probably the largest surprise of the result was a decision to not pay an interim dividend, a function of a disturbingly large increase in working capital, although couched as temporary. We halve our fiscal 2019 DPS forecast to AUD 0.077 from AUD 0.15 for an unappetising 1.7% unfranked yield, even at the current battered share price. The market did not appreciate the working capital build, with the shares down 20% on the day.

But at AUD 4.43, Nufarm shares offer even better value, in our view. Over the longer term, we still expect the rise in global average per capita incomes to shift the makeup of calories consumed towards a higher protein intake and more fruit and vegetables, which is favourable for crop protection products.

We project a strong 11.5% five-year EBITDA compound annual growth rate to little changed AUD 617 million by fiscal 2023, capturing normalisation from a subaverage launch point in fiscal 2018. Our fair value estimate equates to a fiscal 2023 enterprise value/EBITDA of 6.7, price/earnings of 31.1, and dividend yield of 2.1%, all discounted for weighted average cost of capital. We expect an average 5.5% CAGR in revenue to AUD 4.3 billion by fiscal 2023 at a 14.3% midcycle EBITDA margin. This is better than the five-year historical average margin of 11.4%, including fiscal 2017’s improved 12.1%, crediting favourable growth prospects, accretive acquisitions and cost-outs.

Increased working capital of AUD 449 million over July 2018 reflects sales growth in North America and Latin America, dry conditions in Australia, and supply issues in Europe. However, this is expected to substantially decrease in the second half of fiscal 2019. Supply in Europe will largely be under Nufarm control before the autumn selling season, nearly one year ahead of schedule, and transferred to known Nufarm suppliers. The growth of inventory in North America will be sold into the main planting season. This is apparently not soon enough for a venting market, with a keen eye on a worsening net debt position of AUD 2.26 billion at the end of January, soon after October’s AUD 303 million equity injection. We project net debt/EBITDA to fall to 1.0 by fiscal 2023, from current elevated levels near 3.0 and Nufarm’s medium-term target of 2.0.

While close to expectations, the makeup of fiscal 2019 earnings is surprising, with poorer-than-anticipated performance from Australia and Europe offset by strong showings from North and South America. Europe was negatively affected by a slow start to the season and supply challenges in the acquired portfolios, with the EBITDA margin falling from 13.0% to 7.5%. Challenges continue in Australia because of the drought. Latin American strength reflects market share gains for key products and higher soy plantings in Brazil and a return to stable climatic conditions in Argentina. North America enjoyed early orders for turf and ornamental, which are higher margin. Overall, group first-half fiscal 2019 revenue increased 8% to AUD 1.58 billion, although on a slightly lower 7.3% EBITDA margin versus 7.5% in the first half of fiscal 2018.