Small Caps | 10:00 AM
Nufarm's interim results suggest an approaching inflection point, with stronger margins in Crop Protection and improved earnings and guidance for Seed Technologies.
- Nufarm’s interim result sparked a share price rally
- Margin expansion in Crop Protection offset weaker sales
- Cash generation improves, net debt falls
- Risks include elevated raw material pricing & El Nino
By Mark Woodruff
After a tough couple of years, mainly due to cyclical factors, crop protection and seed technologies company Nufarm ((NUF)) at the close of last month released results for the half year ended 31 March showing margin improvement in Crop Protection and a material uplift in earnings from Seed Technologies.
While the company’s shares bounced in reaction, uncertainty remains in the form of elevated raw material prices, upcoming El Nino weather impacts and delivering on management’s de-gearing targets.
Consistent with previous guidance, management states Nufarm is “well placed to deliver strong growth in underlying earnings and a significant reduction in leverage for the full year”.
Morgans explains management, including new CEO Rico Christensen, is targeting higher-quality earnings through a greater emphasis on higher-value products and markets, stronger cash generation and lower leverage.
Compared to the year prior, underlying earnings (EBITDA) rose by 18% to $243m, broadly in line with guidance, while operating profit increased by 35% to $52m.
Free cash flow (FCF) improved by $193m, while net debt fell by -$135m to $1.23bn.
Management maintained underlying earnings and leverage guidance for FY26 and upgraded guidance for Seed Technologies, now expecting strong earnings growth from Hybrid Seeds, alongside a $40m uplift from Emerging Platforms, compared with previous guidance of $30m.
Morgans explains the uplift for Seed Technologies reflects the expanded carinata offtake agreement with BP and stronger Omega-3 performance, driven by both pricing and operating cost improvements.
Guidance may well prove conservative, in the broker’s view, given the sharp rise in active ingredient and fish oil prices in recent months.
Nufarm's $50m cost-saving program continues to target efficiencies through asset and portfolio rationalisation, operational improvements and changes to the operating model.
The benefits are expected to be realised progressively, with the full annualised run-rate targeted by the end of FY27.
In a nutshell, Nufarm helps farmers and businesses meet the global challenges of food, feed, fibre and fuel production.
The company operates on two main divisions: Crop Protection, which supplies agricultural chemicals, and Seeds Technologies, which develops proprietary seed genetics including omega-3 canola and bioenergy crop carinata.
Crop protection
Crop Protection, which generates the vast majority of revenue and earnings, serves broadacre cropping, horticulture and specialty agriculture markets across Australia, North America, Europe and Asia.
Management explained portfolio mix and a focus on costs improved the gross margin in the Crop Protection segment, highlighting strong margin and earnings growth in Europe Crop Protection.
While Crop Protection revenue was more than -10% below the consensus forecast, UBS explains a stronger-than-expected margin expansion of 1.6 percentage points limited the earnings shortfall to around -4% relative to consensus.
Such margin improvement is considered a reflection of a sharper focus on higher-value products over volume growth in commoditised markets. Elevated portfolio rationalisation is also viewed as a key differentiator that may allow Nufarm to maintain a superior Crop Protection margin profile relative to peers.
Underlying earnings in Crop Protection remained strong, with constant-currency earnings rising 6%, despite foreign exchange and weather-related headwinds.
Regionally, within the APAC region, Australia was affected by dry conditions, while Indonesia and broader Asian operations contributed growth.
North America benefited from strength in Turf & Ornamental and Canada, while Europe delivered 19% growth in underlying earnings.
Nufarm management views the latter as evidence of structural margin improvement.
Seeds Technologies
Within Seeds Technologies, Omega-3 Canola (nutritional) and Carinata (Energy) are usually regarded as the key long-term value drivers.
A refocused Seeds strategy is delivering growth in the Hybrid Seeds division and an improved performance in Emerging Platforms such as biofuel and Omega-3.
Omega-3 canola is a genetically modified canola that produces long-chain omega-3 fatty acids, traditionally sourced from wild-caught fish and fish oil.
Aquaculture, particularly salmon farming, is the largest consumer of omega-3 oils for feed. Unlike conventional fish oil, which is derived from finite wild fish stocks, Nufarm's omega-3 product is grown using conventional agricultural methods.
Omega-3 oils improve fish growth and health, disease resistance, and the nutritional quality of the fish for consumers.
Macquarie points to a sharp rally in fish oil prices, from around US$2,700/t to more than US$4,000/t, driven by a -36% cut to Peru's first-half 2026 catch quotas.
This broker's forecast $10m uplift in Emerging Platforms earnings is based on prevailing spot prices, though realised pricing is expected to lag the market due to sales timing and a greater proportion of contracted volumes.
Carinata, a non-food oilseed crop, is grown on existing farmland after main crop harvest and before the 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.
Producing oil suitable for conversion into renewable fuels, carinata is primarily grown as a feedstock for sustainable aviation fuel, along with other low-carbon biofuels.
The company’s Nuseed division has a 10-year strategic offtake and market development agreement with BP for Nuseed carinata oil.
A turnaround in Emerging Platforms, led by Omega-3 and complemented by strong Hybrid Seeds growth, drove earnings more than 30% above the consensus estimate, UBS explains.
This division is gaining momentum, highlighted by a further $10m EBITDA guidance upgrade, driven by expanded carinata offtake with BP and improved Omega-3 performance. UBS views this as a potential inflection point for Nufarm.
It’s thought an uptick in licensing revenue could be meaningful to margins within Seed Technologies.
Crop Protection volumes could also exceed expectations, reflecting trends highlighted by global peers, while further upside may emerge if recent strength in agricultural chemical pricing continues.
Risks
While encouraged by recent improvements, Citi wants to see further evidence of sustained earnings quality and a more disciplined competitive environment.
Elevated raw material prices and the potential return of El Nino weather patterns are also seen as key risks to the company's outlook.
Macquarie adds second-half de-gearing still needs to be delivered and also highlights the El Nino risk in the next few months.
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