EUR 850.00 For Business Accounts Only

Morningstar | We Forecast a Solid 2019 for Nutrien on Higher Fertilizer Prices; Shares Undervalued. See Updated Analyst Note from 08 Feb 2019

Nutrien reported decent fourth-quarter results as adjusted EBITDA grew 50% year on year on a pro forma basis to $932 million driven by higher fertilizer prices and volumes, and reduced costs, partially offset by lower retail profits. Management guided to a 2019 adjusted EPS range of $2.80 to $3.20, which we think is achievable. With our long-term outlook largely unchanged, we maintain our USD fair value estimate of $68 per share. Our CAD fair value estimate increases to CAD 90 per share from CAD 89 due to a strengthening of the dollar versus the loonie since our last update. Our narrow moat rating for Nutrien remains intact.

In potash, adjusted EBITDA grew 59% year on year during the quarter to $394 million on double-digit volumes and higher prices. We continue to forecast 2019 potash prices of $300 per metric ton on a China delivered basis. We expect the market to remain in balance as new supply from EuroChem ramps up slowly, and we forecast reduced potash production from both SQM and K+S. Our long-term potash price forecast of $310 per metric ton in nominal terms is also unchanged. We see continued demand growth at 2%-3% per year being large enough to require higher cost supply to remain online despite capacity expansions from lower-cost existing producers.

In nitrogen, adjusted EBITDA grew 63% year on year during the quarter to $309 million driven by higher prices and higher utilization rates. We maintain our 2019 urea nitrogen price forecast of $260 per metric ton as higher European natural gas prices will increase costs for European producers that have recently set the marginal cost of production. Although we anticipate more Chinese production in 2019 versus 2018, demand will be boosted by our outlook that more U.S. farmers will chose to plant corn over soybeans as corn requires far more nitrogen fertilizer than soybeans, as soybeans generate most of the needed nitrogen naturally through its symbiotic relationship with rhizobia bacteria.

In the retail segment, adjusted EBITDA fell 11% year on year to $214 million due to lower volumes for crop nutrients and crop protection products. Management pointed to a wetter fall as a driver of the decline. We note that the fourth quarter is typically the smallest quarter of the year for the retail business, and we look for a slightly better start to the year due to the weather impact from the fourth quarter, assuming a normal start to spring.

Earlier in the week, Nutrien announced it reached an agreement to purchase Actagro, which produces sustainable soil and plant health products for $340 million. We expect the transaction to close later this year. We expect the Actagro acquisition will boost retail EBITDA by around $55 million in 2021, the first year we expect it will be widely distributed throughout Nutrien's retail footprint. This implies an EV/EBITDA multiple of 6.2 times, which is below the comparable transaction average of 8.8 times based on PitchBook data. As such, we think this deal will add value to Nutrien. We are also in favor of this move as it aligns with Nutrien's retail strategy to increase its proportion of company-owned proprietary products in its stores, which carry higher margins than third-party products. As Nutrien continues to grow its proprietary product portfolio, we expect retail margins will slightly expand over the next decade.