Nufarm reported first-half FY18 earnings before interest and tax (EBIT) of $75.0m, in line with guidance of $70–80m but down 12% on the same period last year due to weakness in Latin America and scheduled Laverton plant maintenance. Underlying net profit of $10.7m was above our $9.5m forecast, despite currency hedging costs and tax coming in above our estimates as net interest was lower than expected. An unfranked interim dividend of 5cps was announced, in line with our forecast.
Across the divisions, Australia and New Zealand, Europe and corporate EBIT were below our expectations as margins were lower than we forecast, while seed technologies and North America were better than expected, and Latin America was not as bad as feared.
We made the following observations:
- Nufarm has enjoyed strong sales momentum in core geographies despite little to no market growth in recent periods, while its performance improvement program (PIP) has supported margins. Management noted that with low soft commodity prices and high stocks, farmers tend to go through lower-cost options, which has benefited Nufarm and other off-patent companies.
- Recent acquisitions of the Century and FMC portfolios, which were completed in first-quarter CY18, have improved margins and are expected to deliver a significant EBIT contribution from first-half FY19. Nufarm remains open to further value-accretive acquisition opportunities, which would support top- and bottom-line growth in a slow growth market, and help diversify product lines and geographies.
- Omega-3 Australian regulatory approval has been received and an EBIT contribution is expected from FY20–21. Seed technologies will be a key growth driver as Omega-3 canola is commercialised. This should also provide margin uplift as PIP benefits cease, although seasonal and regulatory risks remain.
- Improving the average net working capital to sales ratio remains a focus for second-half FY18 after increasing slightly from 37.1% in to 37.8% in the first half. Management is targeting about 37% for FY18.
We have lifted our EPS estimates by 5.2% in FY18 and 9.6% in FY19, leading us to raise our target price to $10.50 from $9.00. We have upgraded our recommendation to Buy from Hold noting valuation support and strong growth potential.