Shooting first
Nufarm (ASX:NUF) shares were sold down heavily yesterday after a legal judgment in the US against industry peer Monsanto which has been ordered to pay damages in the order of US$289 million. A California state court found that Monsanto’s Roundup weed-killer product contributed to the terminal cancer of a former school groundskeeper. The jury determined that the product and related glyphosate-based brands presented a substantial danger to people using them, and also that there was “clear and convincing evidence” that Monsanto’s officials acted with “malice or oppression” in failing to sufficiently warn of the risks. Monsanto intends to appeal the decision.
While Nufarm has no direct current link to Monsanto or the case, there are wider implications from the judgment, the first of its kind globally, for the industry.
There is an issue of precedent, and with other cases, and several thousand plaintiffs also having claims pending. The case raises the risk of similar claims against Nufarm, and as concerns rise further over the health impacts of glyphosate-based herbicides.
Source: Nufarm (ASX:NUF)
Nufarm is a former distributor of Roundup in Australia, and Glyphosate makes up around a fifth of revenue (and up to 15% of earnings). A noteworthy point is there are conflicting views over the health risks of these types of products. The World Health Organisation’s cancer arm in 2015 classified glyphosate as “probably carcinogenic to humans.” A jury in the US has provided its view, but various regulators have sanctioned the use of glyphosate, with studies having also determined it did not have a definitive link to cancer.
The company itself made a similar statement to the ASX. Nufarm highlighted that the US Environmental Protection Authority, the APVMA in Australia, and the European Food and Safety Authority, have approved the use of Glyphosate. The company however noted that a Brazilian judge had last week suspended existing registrations of the product pending a regulatory review. Appeals are being lodged by a number of associations, and Nufarm expects to be able to continue selling Glyphosate in the upcoming soybean season. Management doesn’t expect either the decisions in the US or Brazil to have any impact on the company’s business. The market though decided to ‘shoot first.’ Prices have since recovered around 4% in today’s trading, with some comfort since being taken by Nufarm’s announcement.
It is the outcome of legal proceedings in the US against another industry player that has clearly damaged sentiment towards Nufarm, which was already weak following the earnings impact of an extended drought in Australia. The long-term thematic backdrop however in our view remains a positive one, with the company well placed to benefit from the world’s rising demand for food, shortage of arable land and the need to increase yields. Astute acquisitions have also strengthened Nufarm’s leverage to this thematic.
Source: Nufarm (ASX:NUF) Investor Presentation
Moving onto the charts, and the technical picture has weakened significantly since our last review, and in recent months. After breaking a zone of support between $8.68 and $8.97, support at the 2018 low of $7.74 has also given way, in addition to that at $7.07 being the 127.2% Fibonacci retracement. Support at the 161.8% Fibonacci retracement around $6.22 has held, but an extensive period of base building will now be required.
Regarding the monthly chart, prices have also breached the long-term uptrend line (upward sloping green line). The series of higher highs and higher lows in formation since 2014 had been indicative of a solid uptrend in play. Support at $7.15 has also been breached, and has further damaged the technical picture. Some consolidation will now be needed to improve the outlook, and a move back towards the 38.2% Fibonacci retracement at $8.44 and ultimately the upward sloping trend-line.
Summary
It is the outcome of legal proceedings in the US against another industry player that has clearly damaged sentiment towards Nufarm, which was already weak following the earnings impact of an extended drought in Australia. Nufarm’s announcement that legal judgments will not impact the company’s business are comforting, even if the industry ramifications have further to play out. It must also be noted that Nufarm has gone to some lengths to diversify its product base in recent years, with glyphosate once making up 50% of the business.
The long-term thematic backdrop however in our view remains a positive one, with the company well placed to benefit from the world’s rising demand for food, shortage of arable land and the need to increase yields. Astute acquisitions have also strengthened Nufarm’s leverage to this thematic.
Nufarm (ASX:NUF) shares trade around 22 times FY18/FY19 earnings, but this drops away to 13 times for FY20. We believe this is a modest valuation, but we also have to accept that with further damage to the technical picture following the Monsanto verdict, some-time will likely be needed for the shares to recover. Accordingly, we are changing our recommendation on Nufarm to a Hold.
Disclosures: Nufarm (ASX:NUF) is held in the Concentrated Australian and Small/Mid-cap managed account portfolios.
