Nufarm Still A Target, But Focus Back On Earnings

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This story features NUFARM LIMITED.
For more info SHARE ANALYSIS: NUF
The company is included in ASX300 and ALL-ORDS

By Chris Shaw

The Chinese have been rumoured buyers of Rio Tinto and stakes in any number of other companies supplying resources or materials they need, but one of the few instances of a genuine expression of interest was an indicated bid of $17.25 for agrichemicals group Nufarm ((NUF)).

That was until yesterday, when the combined interest of private equity and the China National Chemical Corporation (ChemChina) in acquiring the group ended with no firm offer being made.

Where there was a predictable share price correction yesterday with Nufarm stock shedding the takeover premium that had been priced in brokers remain of the view the company is still an attractive target.

Credit Suisse expects further deals in the global agrichemicals sector following the recent private equity acquisition of Arysta, with Arysta itself being considered a potential buyer of Nufarm by JP Morgan.

Others with reason to look at the company according to Macquarie are Mahkteshim Agan and United Phosphorous, but in the broker’s view the key will be the pricing of any possible deal.

The broker points out recent deals in the sector have been priced at around 11.6x EBITDA (earnings before interest, tax, depreciation and amortisation) or 15-16x EBIT (earnings before interest and tax), while the ChemChina proposal for Nufarm was pitched at 12.5x EBITDA and 14.9x EBIT respectively.

This implies the deal price of $17.25 was reasonable given previous deals, Credit Suisse noting an offer pitched at an EV/EBITDA multiple of 11.7 times implies a price of $17.50 or better.

With the ending of talks there is no cost to Nufarm as the deal had no termination fee, so the focus for the company in the shorter-term becomes its day-to-day operations. JP Morgan doesn’t expect any significant change by management such as a re-gearing of the balance sheet or a change in strategy, meaning the market will concentrate on earnings from here on.

Credit Suisse expects flat volumes for the company in Australia but modest gains in both the American and South American markets, the broker forecasting EPS (earnings per share) outcomes of 85.8c this year and 96.6c in FY09. By way of comparison Macquarie is forecasting EPS of 80.4c and 91.8c respectively, UBS is forecasting 80c and 92c and Thomson One Analytics shows median forecasts of 82c and 95c.

The major change has been to broker price targets as the takeover premium that had been in the stock has now been removed. As a result Macquarie has cut its target to $14.14 from $17.25, UBS to $15.10 from $17.25 and Credit Suisse to $15.50 from $17.25.

This leaves the average price target according to the FNArena database at $15.32, down from $16.53, while the median price forecast prior to the deal collapsing according to Thomson One was $17.40.The database shows Nufarm is now rated as Buy once, Sell once and Hold five times, UBS the only change in upgrading to a Neutral recommendation from Sell previously.

Shares in Nufarm today are weaker and as at 1.00pm were down 34c at $14.36.

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