Australia | Sep 29 2011
– Nufarm's earnings met previously lifted guidance
– Forecasts and targets revised
– Ratings on Nufarm remain split
By Chris Shaw
Earlier this month Nufarm ((NUF)) lifted full year profit guidance to a result of more than the $88-$94 million forecast in July and yesterday's result met this guidance as underlying net profit came in at $98.3 million. This equates to growth of 68% relative to the previous corresponding period.
The result was viewed as somewhat mixed by brokers covering the stock, Goldman Sachs noting while improved operating performance within the South American division has seen estimates for that region lifted, this is offset by cuts to expectations for the North American businesses and to a lesser extent the Australasian operations.
Company guidance also suggests a higher tax rate for Nufarm going forward, which supports the move by Goldman Sachs to cut earnings estimates in coming years. In earnings per share (EPS) terms forecasts have been cut by 14.8% and 14% respectively for FY12 and FY13.
Citi has reacted differently to the result, lifting earnings forecasts by around 5% in both FY12 and FY13 to reflect an improved product mix and a modest increase in margins. Citi expects above average operating conditions for Nufarm should continue for another year.
Deutsche Bank has also lifted forecasts by a similar level to Citi, but the broker suggests earnings risk at present remains to the downside. BA Merrill Lynch has sided with Goldman Sachs, trimming forecasts slightly to account for more normal conditions in the Australian market. Consensus EPS forecasts for Nufarm now stand at 41.9c and 49.3c respectively, which compares to the 33c achieved in FY11.
One key element in the Nufarm result according to BA-ML was an improvement in debt, as gearing has fallen to 30% from 35% in the previous corresponding period. This suggests the benefits of recent restructuring moves are starting to become apparent, so there remains potential for further margin expansion in coming years as the product mix continues to improve.
A further positive is Nufarm appears close to finalising a $600 million debt refinancing, an announcement BA-ML suggests will go a long way to allaying market concerns over existing debt. Citi estimates an amount of a little more than $600 million is a sustainable debt level for Nufarm going forward.
While market conditions for Nufarm are seen as favourable for the year ahead, Citi sees some growth constraints longer-term as conditions normalise. There is also scope for some market share losses thanks to rising import competition in Australia and stronger competition generally in chemicals markets.
This leaves brokers with mixed views on Nufarm at current levels, as evidenced by the breakdown of ratings in the FNArena database of four Buys, two Holds and two Sells. Deutsche has made the only rating change post the profit result, downgrading to a Sell on Nufarm on valuation grounds given the stock is trading at a 15% premium to the broker's valuation of $3.75.
The Hold argument from Citi is that while the stock appears fairly priced given reduced refinancing risks and favourable near-term conditions, there is a need to be cautious longer-term given the expectation of increasing competition in Nufarm's markets.
The Buy argument from BA-ML is that the evidence of restructuring benefits flowing through and reduced debt concerns makes the stock more attractive, especially given the expectation of another year of good operating conditions. The split in broker views is reflected in a wide spread of price targets, which range from $3.75 to $5.90.
The consensus price target for Nufarm according to the FNArena database is $4.89, up slightly from $4.80 prior to the profit result.
Shares in Nufarm today are weaker in line with the broader market and as at 11.15am the stock was down 16c at $4.16. This compares to a range over the past 12 months of $3.08 to $5.80. The current share price implies upside of around 14% to the consensus price target in the FNArena database.
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