Balance Sheet Boost

Nufarm reported FY18 earnings before interest and tax (EBIT) of $265m, down 12% on the same period last year but above Ord Minnett’s $261m forecast. Underlying net profit of $98.4m was above our $96.6m estimate, despite currency hedging costs of $26.6m (versus our $10m forecast) and a higher tax charge than our estimate as net interest was lower than expected. A final dividend of 6cps was declared, taking the full-year payout to 11.0cps.

 

The company also announced a $303m fully underwritten entitlement offer to manage short-term balance sheet risk and support the company’s growth strategy in light of recent market uncertainty. This comes in the wake of a weak period for Nufarm, with its share price falling 25% in the past three months, and addressing the deteriorating capital position makes sense to us.

 

We make the following observations:

 

  • The capital raising at $5.85 removes the share price overhang due to gearing (3.1x) as uncertainty remains for the Australia and New Zealand (ANZ) segment.
  • Sumitomo Chemical, Nufarm’s largest shareholder, will not participate in the entitlement offer, but remains committed to its relationship with Nufarm with a new five-year contract in the US.
  • The FMC and Adama acquisitions should improve margins, with the European contribution in FY19 a key positive.
  • The average net working capital to sales ratio may disappoint as the first-half FY19 ANZ inventory outlook is grim.

Nufarm’s share price has been affected by poor weather, but our investment thesis remains intact. We see strong sales momentum in core geographies, despite little to no market growth in recent periods, with further growth opportunities in the form of Omega-3 canola, although seasonal and regulatory risks remain.

 

We maintain our Buy recommendation, but have lowered our target price to $7.50 from $9.00 in line with our reduced earnings forecasts to reflect the entitlement offer and outlook commentary.

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