Nufarm’s Improving, But Risks Remain

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

By Chris Shaw

At its annual general meeting yesterday Nufarm ((NUF)) guided to earnings for the first half of FY11 of $10-$20 million, which was on the back of first quarter sales and gross margins coming in above those of the previous corresponding period.

Guidance was somewhat disappointing in the view of Credit Suisse, as given full year consensus forecasts were around $93 million in net profit after tax terms Nufarm would need deliver a record second half for these expectations to be met.

As Credit Suisse points out, historically Nufarm generates about 70-75% of its earnings in the second half of the year, so even at the upper end of the guidance range for the first half the implication is for full year earnings of only around $74 million.

The hope of Credit Suisse is the new guidance proves to be conservative, otherwise the stockbroker expects cuts to consensus earnings forecasts for the full year. Some peers do see guidance as on the conservative side, as BA Merrill Lynch continues to forecast an interim net profit of $24 million.

RBS Australia viewed the guidance as better than expected, its forecast for the first half being for a profit of $15 million. As the operating environment for the company appears to be improving, RBS has lifted its estimates post the result by about 19% in FY11 and by 26% in FY12.

In earnings per share terms RBS is now forecasting 33.8c this year and 42.4c in FY12, which is broadly in line with consensus forecasts according to the FNArena database of 32.3c in FY11 and 42.2c in FY12.

Deutsche Bank remains well below consensus with EPS forecasts of 20c in FY11 and 26c in FY12, which may reflect the broker's approach of taking interim financing fees and strategic review costs below the line and refinancing costs above the line. Even though they are at the bottom of the market with their forecasts, Deutsche does expect earnings in both the first half and for the whole of FY11 will be better than for the previous corresponding periods.

With respect to Nufarm's strategic review, Deutsche Bank sees the process as tracking to expectations, the recommendations to date including a stronger presence in higher margin segments, a rationalisation of the product portfolio and moves to exit underperforming markets. Some cost savings and efficiency opportunities have also been identified.

While some benefits should accrue from the strategic review, the other positive for Nufarm in RBS's view is a much improved operating environment. Soft commodity prices are rising and better seasonal conditions are supportive of strong demand for agricultural chemicals.

As well, RBS suggests the successful debt refinancing and improved operating environment should help restore some investor confidence in the company. Here Credit Suisse is more cautious, as while it suggests the worst is now likely behind the company, a bullish recovery already appears to be being factored into the share price.

On Credit Suisse's forecasts, Nufarm is trading on an earning multiple of about 15.7 times in FY11, which it notes is above the generic crop protection company average of 10-12 times. This premium comes despite a poor track record, uncertain weather conditions and potential management and board changes and so is difficult to justify in the broker's view.

As a result Credit Suisse continues to rate Nufarm as an Underperform, while the FNArena database shows the company is rated as Buy and Sell four times each. Deutsche Bank sides with Credit Suisse and has a Sell on the stock, this largely a valuation call given Nufarm is trading at a 45% premium to valuation on the broker's numbers.

RBS counters by upgrading Nufarm to Buy from Hold post the AGM, seeing better confidence in the company's outlook and scope for a greater than expected earnings rebound and possible corporate activity as reasons to be more positive on the stock.

BA-ML also has a Buy on the stock, expecting Nufarm to recover as market conditions normalise given the strength of the company's distribution channels, product offerings and branding power. Prior to the Nufarm AGM, Macquarie had upgraded to Outperform from Underperform, suggesting the successful debt refinancing will allow the company to better exploit improving operating conditions.

Post the AGM, the FNArena database shows a consensus price target on Nufarm of $4.64, which is up from just below $4.50 prior to the AGM update. Targets range from Deutsche Bank at $3.30 to BA-ML at $5.50.

Shares in Nufarm today are slightly higher and as at 10.30am the stock was up 4c at $4.84. This compares to a trading range over the past year of $3.20 to $11.38 and implies downside of around 3% to the consensus price target in the FNArena database.

Click to view our Glossary of Financial Terms