Nufarm Upgraded On Better Than Expected Outlook

This story features NUFARM LIMITED. For more info SHARE ANALYSIS: NUF

By Chris Shaw

To lift earnings guidance in the middle of what is known as confession season suggests a company is enjoying a period of particularly strong performance, especially when the upgrade for the current year is accompanied by a significant increase in guidance for profits in FY09 as well.

As agricultural products group Nufarm ((NUF)) had already been expected to perform well given strong markets for its products the upgrade is even more impressive and has seen brokers revise not only earnings estimates but in the case of  UBS, GSJB Were and Credit Suisse their ratings as well, all three brokers upgrading the stock to Buy on the back of the news.

The company now expects earnings for the financial year of between $155-$160 million, which as UBS notes, is around 3% above previous expectations. The big increase is reserved for FY09 though as the company has indicated it now expects to report a profit of between $220-$230 million, which on UBS’s assessment is about 20% above the market’s previous consensus forecast.

Management indicated the better than expected outlook for next year is the result of continued strength in both demand and pricing for its products, while the company is also benefitting from better than expected performance from recent acquisitions and expansion into new markets such as the Middle East.

As Credit Suisse notes it is this expansion into new markets and strong performance from existing overseas operations that are largely behind the revised guidance, as heritage business growth of 25% in FY09 will be derived largely from international operations rather than its Australian businesses.

This also shows the strength of the group’s operations as it highlights in the broker’s view just how the company has been able to diversify its earnings base to make up for adverse conditions in one or some of its markets at any point in time. Australia is an obvious example at present as the lack of follow-up rain means earnings performance in the domestic business will be subdued in the year ahead if conditions stay as they currently are.

In the broker’s view earnings risk appears to be to the upside given the timing of the latest revision to guidance as it comes a long way before the end of FY09 and is subject to both currency risk and changing weather conditions.

GSJB Were took a similar view on the guidance, suggesting the update shows improved medium-term prospects for the group as new products in South America in particular begin to gain footholds in markets there and trends remain positive in more established markets such as Australia and the US.

Post the update the broker has lifted its FY09 numbers by almost 25% to 113.6c in earnings per share (EPS) terms, while Credit Suisse lifted its forecast by 18% to 123.5c and UBS from 95c to 112c, which compares to the previous consensus forecast of 107c.

According to the FNArena database the consensus EPS estimate for FY09 for the stock is now 112.3c, so if Credit Suisse is right in its view further upgrades to the market’s numbers can be expected. The new forecast compares to a consensus estimate for EPS in FY08 of 83.8c.

Following today’s upgrades the FNArena database shows the stock is now rated as Buy six times and Hold twice, with an average price target of $18.02, up from $17.26 prior to the guidance revision. The median price target according to Thomson One Analytics is $18.30.

Shares in Nufarm today are stronger and as at 12.05pm the stock was up 65c or 4.0% to $16.75, which compares to a trading range over the past 12 months of $12.05 to $18.50.

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