Nufarm’s Growing Optimism

Small Caps | 10:30 AM

Nufarm posted a better than feared FY25 result, surprised by deciding to retain its Seeds business, and has optimistic growth targets for FY26.

• Nufarm’s FY25 was weak, but not as weak as feared
• Seed Technologies business to be retained and turned around
• De-gearing the balance sheet remains crucial
• CEO transition should not disrupt operational momentum

By Greg Peel

Crop protection and seed technologies company Nufarm’s ((NUF)) FY25 result (September year-end) was weak. Seed Technologies posted a particularly poor performance due to low fish oil (Omega-3) prices.

Leverage at year-end was “far too high,” in Morgans’ opinion, at 2.7x. Yet the stock ran up 8% on release.

The result was weak, but earnings came in ahead of consensus and guidance. Fish oil prices have since rebounded. And while leverage was well above management’s 1.5-2.0x target, it was lower than the 3.0x consensus had expected. There is now optimism building for FY26.

Nufarm “helps farmers and businesses meet the global challenges of food, feed, fibre and fuel production”. The company’s sales rose 2.9% in FY25, earnings fell -3.3% (a beat of consensus) and a loss of -$22.9m was reported due to material D&A and interest.

Crop Protection had a solid year. Asia-Pacific earnings rose 9.9%, North America rose 19.2% and Europe increased 21.5%. Crop Protection margins rose due to an improved cost of goods sold (COGS) position and a more favourable product mix.

On the downside, Seed Technologies earnings fell to $13.9m from $62.6m in the prior year due to materially lower fish oil prices, resulting in Omega-3 trading losses and a large write-down to inventory.

Nufarm also saw lower Carinata licensing revenue and increased investment, while drought in Australia also impacted canola seed sales. Corporate costs rose 26%.

Carinata is grown on existing farmland after main crop harvest and before next season’s planting, when fields are typically bare and exposed to erosion and carbon loss, to help protect land, sequester carbon, regenerate soil, and improve conditions for the following main crop.

No Sale

The Sword of Damocles has been hanging over Nufarm’s perennially poor performing Seed Technologies business for some time now, despite previously having been seen as a solid future earnings driver.

With fish oil prices wallowing, the market had long been expecting Nufarm to sell the business or simply shut it down. But Nufarm has now decided it will keep the business.

Retaining Seed Technologies takes away a potential near-term catalyst regarding value discovery and balance sheet de-gearing, Macquarie notes, but nor was the stock factoring this in.

It does mean not selling at the bottom, but also that third parties are not prepared to "pay up" for the business.

Citi was surprised by Nufarm’s decision initially. However, the company appears to have taken appropriate measures to turn Seed Technologies around and specifically focus more on cost control and lowering capital requirements, particularly with respect to Emerging Platforms (such as biofuel and Omega-3).

Nufarm expects a $30m swing back from the FY25 Emerging Platforms earnings loss in FY26, but this is largely locked in with -$29m inventory write-down taken in FY25. Earnings risk for Omega-3 is likely to the upside especially if fish oil prices continue their upward trajectory, Citi notes.

The fish oil price in November has stepped up by some 30% versus September and 24% versus October. Citi forecasts Seed Technologies earnings to come in at $51m which effectively factors in Hybrid Seeds reverting back to FY24 earnings levels and -$23m earnings loss from Emerging Platforms.

Nufarm has reprioritised the strategy for Seed Technologies, with lower costs and capex requirements, a clear focus on growing its very profitable Hybrid Seeds business, expanding Bioenergy and reducing the cash costs of Omega-3.

Optimistic Outlook

Nufarm is expecting to deliver strong underlying earnings growth in FY26 assuming normal seasonal conditions and market pricing.

For Crop Protection, management expects underlying earnings growth. However, it will be less than the 18% growth achieved in FY25. Further improvement in gross profit margin is expected from selling higher-margin products.

For Seed Technologies, Nufarm expects underlying earnings growth from Hybrid Seeds, targeting a $30m improvement in Emerging Seeds versus a -$53m loss in FY25.

Nufarm has taken a conservative stance with its outlook commentary around Crop Protection, Citi notes. While it is hopeful of an uptick in pricing, the base case for earnings growth centres around improving volumes across every region.

Further to this, stabilisation of pricing should deliver a COGS benefit to Nufarm, Citi suggests.

The $30m earnings improvement in the Emerging Seeds businesses will be driven by the non-recurrence of -$29m FY25 Omega 3 inventory writedowns (spread over two years) and Carinata growth. BP Plc continues to be a strong supporter of Caranita, Macquarie notes.

Nufarm’s Nuseed division has a 10-year strategic offtake and market-development agreement with BP for Nuseed Carinata oil, used as a low-carbon biofuel feedstock.

Omega 3 will take two to three years to be cash flow positive as not producing a crop this year and shift to lower cost LatAm production from the US will take time to deliver.

Nufarm sees a path back to the 2.0x gearing range in FY26, from 2.7x in FY25, as the company has passed peak capex (less than -$200m in FY26 or -$50m lower than FY25), less Omega-3 cash drag (not producing new crop in FY26 and selling out of existing inventory) and cost-outs targeting $50m in benefits.

First half FY26 net debt is expected to increase seasonally back to first half FY25 levels but with lower gearing, and then it's all about delivery in key second half period, Macquarie points out.