Cash In On Nufarm, Watch Incitec

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

By Greg Peel

It’s been a big year in the agricultural sector, driven by soaring global grain prices and the inherent volatility that only the weather can bring. There has been a mad rush to plant crops for ethanol production, particularly in the US, while the changing appetite of emerging economies has provided an added impetus to grain demand, both for direct consumption and for the feeding of livestock.

Star performer has been fertiliser company Incitec Pivot ((IPL)) which has proven that even the most unpleasant of concepts can be a big money spinner. Incitec’s share price has close to quadrupled for the year. While less spectacular, another beneficiary has been crop chemical company Nufarm ((NUF)) which surprised no one yesterday when it announced a much anticipated takeover offer. So where to from here?

In the case of Nufarm, a consortium of China National Chemical, Blackstone and Fox Paine Management has made a conditional offer for the company at $17.25 with a 30c dividend thrown in for existing shareholders. This is roughly a 35% premium from starting price and just goes to show that private equity is alive and well as long as China’s involved. In other markets proposed deals are been withdrawn with increasing speed.

The deal represents an FY08 price/earnings of about 22.3x which means analysts consider it to be a good one for Nufarm shareholders. Of the five FNArena brokers airing their views this morning, four suggested shareholders take the money and run. Only Credit Suisse saw scope for another bidder to emerge, while the others all thought this unlikely given the already substantial premium. Nufarm’s board has suggested shareholders accept the offer, but only in lieu of another bid emerging.

Macquarie analysts have been caught out by the bid, having up to now largely scoffed at the constant rumours that preceded the trading halt. But yet they are still offering a warning, suggesting that recent history shows those who hold out for more, or speculators who jump in on the basis of a battle, have been burnt. Rinker ((RIN)) and Orica ((ORI)) are two examples.

Ratings and targets now become largely meaningless, although it is notable both Macquarie and UBS are sticking to Sell to emphasise their advice. The average target also moves up to match the bid. The market in general looks like it’s settled on Nufarm being sold to the consortium, with the stock at $17.36 in late morning trade. That splits the $17.25-$17.55 spread on the share bid plus dividend, given new buyers won’t qualify for the dividend.

While the same sort of takeover speculation hasn’t really greeted the runaway Incitec, there’s no doubt a little bit of premium in there. But according to the analysts at Credit Suisse the question is not one of takeovers but of fertiliser prices. The prices of both diammonium phosphate (DAP) and urea are continuing to firm in global markets.

The price of urea is currently averaging US$310-345/t while DAP is fetching $459-480/t. CS reveals industry insiders are looking at a DAP price of US$500/t by year end. Every US$10/t in DAP price means A$12m in earnings to Incitec, while every US$10/t in urea adds A$4m, says CS. On the flipside, every US1c in the Aussie knocks off A$6m.

Credit Suisse analysts are at the top of consensus forecasts by about 20%, but still they believe there is more upside to their forecasts given they are not even assuming spot prices for fertiliser. This would add A$25m or just under 10% to their profit forecast. They suggest that like other commodities, such as metals and oil, fertiliser has made a secular shift upwards in value and prices are likely to stay robust for at least the next five years. This is where everyone got metals wrong, constantly assuming a reversion to mean prices.

CS is currently restricted on its rating given another part of the bank is dealing with Incitec on something or other. But it would likely be Outperform on the strength of its view – a view that has changed in recent times given CS’s rating was Neutral for a while there. An Outperform would give Incitec a B/H/S rating of 3/4/1 with the Holds a bit concerned about the strong share price and Deutsche Bank (Sell) suggesting the stock is 47% over fair value. That’s Deutsche’s fair value however, and at $60 Deutsche’s target is both way behind the curve and a good deal below Citi’s high mark of $103.30.

The average target is $84.14, and the stock is trading around $88.25 at present. Will fertiliser confound everyone just like copper did?

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