A Bottom For Nufarm Shares?

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

By Chris Shaw

Nufarm ((NUF)) has advised the market net debt for FY10 is likely to be $620 million, up from the $450 million indicated at the company's previous update on July 14th. The increase in net debt reflects higher working capital requirements.

Macquarie notes this increase in debt is specifically due to a higher receivables balance, given cash from sales made in June and July won't be collected until after the end of the year. At the same time management has confirmed previous guidance for full year earnings of $55-$65 million.

Deutsche Bank points out the increase in debt means a breach of existing debt covenants. This will require the waiving of some existing covenants, something the broker expects by the middle of September. As well, a new banking structure should be in place by the end of the year.

Along with the update on debt levels, Nufarm has announced a strategic review, with Deutsche Bank expecting results by the end of this year. The review will cover budgeting and forecasting processes, information systems and management reporting.

While the debt covenant issue is not seen as major, there will be an earnings impact from the increase in debt levels. As an example, Macquarie has cut its earnings per share (EPS) forecasts in FY11 by 11% and in FY12 by 6% to 35.4c and 49.3 respectively. This compares to a forecast of 17.6c in FY10.

Similarly, Deutsche Bank and UBS have lowered their EPS estimates by up to 10% through FY11, meaning consensus EPS forecasts for Nufarm according to the FNArena database now stand at 22.8c in FY10 and 36.1c in FY11.

The changes to earnings estimates have resulted in changes to price targets, With Deutsche Bank and Macquarie the most aggressive. The former has lowered its target to $3.70 from $4.10, while the latter's target falls to $4.04 from $4.50. The average price target for Nufarm according to the FNArena database is now $4.27, down from $4.39 prior to the update.

While the debt blowout is not positive news, Nufarm has actually enjoyed some upgrades from brokers, with both Deutsche Bank and UBS lifting their ratings to Hold from Sell recommendations previously to reflect improved valuation. (Mind you, these improved valuation come on the back of another sell-down in the Nufarm share price).

UBS points out Nufarm's share price performance has been weak of late, with Deutsche noting the stock is now trading about 3% below its revised valuation of $3.70. The FNArena database shows post the upgrades Nufarm is now rated as Hold eight times and Sell once.

This comes courtesy of Macquarie, the broker taking the view the stock is unlikely to outperform while debt levels are an issue and while the outlook is for a slower than expected recovery in the group's Australian and North American markets.

Shares in Nufarm today are slightly higher and as at 11.15am the stock was up 3c at $3.62. Over the past year the shares have traded in a range of $3.20 to $12.22, while the current share price implies upside of about 15% to the average price target in the FNArena database.

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