Nufarm Turnaround Harvests Praise, More Upside Likely

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

-Earnings improvement likely
-Risk in softs pricing, weather
-Further re-rating possible
 

By Eva Brocklehurst

Nufarm ((NUF)) met the debt and working capital goals it set for FY14, sparking several ratings upgrades from brokers. Management is given credit for strengthening the balance sheet position and cash flow is expected to continue to improve. Moreover, Nufarm is confident that debt and working capital can be reduced further over the next two years. NUF shares have rallied strongly in the wake of the FY14 result, but many brokers expect there could be more upside to come.

The time is right to take another look at the stock, in CIMB's opinion as if the seasons deliver, material earnings improvement is likely. The broker raises FY15 and FY16 forecasts and calculates that delivering on management's figures, the next two years could release $200m. Credit Suisse calculates the company could generate enough free cash by FY16 to lift its dividend to a yield of 6%. On FNArena's database consensus estimates put the FY16 dividend yield at 2.8% currently. Credit Suisse upgrades to Outperform from Neutral, but remains wary that soft commodity prices could reduce FY16 plantings or squeeze output pricing for crop chemicals.

Deutsche Bank is also wary of the decline in soft commodity prices but expects Nufarm's earnings will improve in FY15, given a return to more normal seasonal conditions in North America and Australia. North American earnings in FY14 were well below the broker's forecasts and Australia was also adversely affected by weather. But the market most at risk of declining soft commodity prices is South America and the broker notes the company is attempting to mitigate all risks by actively assessing credit exposures. Europe is expected to be flat, with higher branded sales offset by lower manufacturing overhead recoveries. That all said, Deutsche Bank upgrades to Buy from Hold.

JP Morgan is a little more cautious and considers the rise in the share price, combined with the risks around demand in Australia because of the rainfall necessary to return to "normal" seasonal conditions, means the stock represents fair value on a risk/return basis. Nevertheless, JP Morgan also acknowledges a better balance sheet, with gearing falling significantly and a capital raising risk removed. Growth in South American sales has permanently increased the seasonality of the company's working capital requirements with a peak at the end of the first half. As a result, the broker believes concerns regarding gearing could re-emerge in March 2015. Goldman Sachs is also in the cautious camp. The broker is concerned about the decline in soft commodity prices, which could potentially cause farmers to reduce planted acreage and lead to lower demand for crop protection chemicals, especially in South America.

The turnaround in cash flow was the main feature of the results for UBS. The company appears in a much better position in the current half year to manage its funding needs. UBS raises FY15-16 earnings forecasts by 6%, reflecting a higher base and positive FX impact and, for the first time since October 2012, upgrades its rating to Buy from Neutral. UBS acknowledges the company's earnings can be difficult to forecast but believes its estimates incorporate conservative outcomes within the key segments of Australia and Latin America. Macquarie welcomed the positive news on cash flow, working capital and debt reduction and expects the easing of fears over the balance sheet will allow the stock to re-rate towards multiples consistent with international peers.

If it were not for the achievement of cash flow and balance sheet metrics, Citi believes that the company would be unable to take advantage of an enviable position in Latin American markets, as well as the improving outlook in Australia and the long-term prospects for seeds. Citi expects the prospect of robust FY15 earnings growth should support the share price although risks remain, none the least being the cropping conditions in Australia. Citi sticks with a Neutral rating.

The Buy ratings have the upper hand on the FNArena database and now number five compared with two previously. There are now two Hold ratings, compared with five previously. The consensus target is $5.16, suggesting 8.4% upside to the last share price and this compares with$4.73 ahead of the results. Targets range from $4.85 to $5.87. 
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms