Nufarm (ASX:NUF) is a stock we have successfully recommended previously in The Dynamic Investor report. Considering the strong gains in the share price since our most recent report, we recently revisited the fundamentals to gauge the prospects of further upside.
Nufarm is a leading crop protection and seed technologies company. NUF develops, manufactures, and distributes a range of herbicides, insecticides and fungicides which are used by growers to protect their crops against weeds, pests, and diseases. In crop protection, it primarily operates in the off-patent segment of the market.
Its seeds business uses proprietary technology and NUF is developing its seed treatment capabilities. The crop protection business is focused on major agricultural markets in Europe, North America, and Asia Pacific (APAC).
NUF has formulation and manufacturing facilities in nine countries, marketing operations in over 30 countries and distributes its products in ~100 countries across Australia & NZ, Asia, North America and Europe. It has a strategic alliance with its largest shareholder, Sumitomo Chemical Company (who owns 15.9% of NUF) and a sales and marketing JV in China with Fuhua Group (who owns 5.8% of NUF).
Key Fundamental Drivers
Earnings at a Cyclical High
In a trading update issued to the ASX on 26 April, there was a continuation of the strong market conditions outlined in an earlier trading update issued to the ASX.
In February, the Company provided EBITDA guidance that was well above prior market consensus. NUF has seen strong demand and increased revenues for its crop protection and seed products during 1H22. These factors reflect strong soft commodity prices and favourable trading conditions in each of the operating regions. In particular, agriculture conditions across all geographic regions remain favourable.
Favourable volumes and pricing for crop protection products are offsetting higher costs. To this end, the Company noted in the trading update some uncertainty and volatility in relation to active ingredient pricing, global supply chain and logistics challenges. NUF’s customers have likely pulled forward some volumes into the 1st half, as they seek to ensure product, amidst potential supply chain disruptions and volatile active ingredient pricing.
Clearly Defined Long-Term Revenue Targets
Nufarm recently outlined their strategy and aspirational targets to 2026. While the strategic basis of the targets is in line with the direction of the business previously outlined by the Company, the additional details provide more concrete specifics, thus increasing investor confidence in the future direction of the business.
NUF has an overall ambition to achieve annual revenue >$4b by 2026. This equates to revenue growth of >4.5% on a CAGR basis from FY21-26 and assuming an FY21 revenue base of $3.2b. While there are a number of facets to the growth targets, it is clear that two of the key pillars will be the existing Seeds business (i.e. Omega 3/Carinata), as both present clear market opportunities.
More specifically, the revenue growth is expected to be derived from three areas:
i. $300m from growth from the existing Crop Protection business;
ii. $500-600m of additional upside within the Crop Protection business from the new product pipeline, and
iii. $400-500m from additional Seed Technologies platform growth, which would see this become a $600-700m business by 2026* and then $1.5b by 2030. At this time, EBITDA margins of 25-30% are targeted, highlighting the potential attractiveness of this business. This is especially given that the group EBITDA margin is 11%.
Within the Crop Protection business, the path to success focuses on retaining a focused approach targeting key applications with the greatest potential upside and continuing to drive new product development and the introduction of disruptive technology by leveraging global scale and commercial relationships. The Company has a significant project pipeline and have indicated that the top 22 identified projects are expected to have a total addressable market of $$6.6b by 2026. Product launches are expected to be phased over the coming years.
Gearing Expected to Decline Further
Gearing (on a net debt to EBITDA) as at 30 September 2021 declined further, to 0.9x and remains well below the Company’s target gearing range of 1.5x-2.0x.
Given that NUF’s cashflows are skewed towards the 2nd half of the financial year, gearing is expected to decline further by the end of FY22 (NUF has a September balance date). Coupled with a strong liquidity position ($597m of undrawn facilities and $724m in cash at the end of FY21), the Company is well positioned to pursue growth opportunities (growth projects and/or small bolt-on acquisitions) in order to support its aspirational targets and/or return capital to shareholders (including special dividends and/or share buybacks).
We remain attracted to Nufarm’s fundamentals. This is given the clearer (and achievable) outline of the long-term revenue growth path, continued favourable trading conditions across all markets, as well as the significant progress made to date with regard to the Omega-3 and Carinata seeds platforms. Aside from the appeal of the Carinata business, there has been increased adoption of Omega-3 Aquaterra amongst Chilean aquafarm customers.
While EPS growth forecasts have been upgraded since the recent trading updates, they appear to not fully reflect the potential earnings upside from the seeds business. Having said that, we expect a re-rating in the shares (i.e. a higher multiple) to be gradual, given the inherent risks, such as sensitivity to seasonal conditions, supply chain / input costs and the risk that new products within the Seeds Technologies segment take longer than expected to ramp up.
Our last charting comment at the end of November noted that Nufarm should head higher again, and that led to the stock peaking at the end of April. The last couple of weeks has seen it fall sharply on increased volume. This means that we are likely to see better buying levels in the short-term. We would be looking for support near the April low of $6.15, which would be the better buy point. Investors could then place a tight stop under $6.15 because falling under that low would be a negative sign.
*In context, this compares to $241m Seeds revenue in FY21.
Michael Gable is managing director of Fairmont Equities.
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