Grow A Better Tomorrow
Shares in this multinational farm crop protection solutions and seed technologies player Nufarm plummeted last Tuesday following the announcement by major shareholder Sumitomo Chemical (Sumitomo) of its intention to sell its 15.9% holding in the company. But after the market digested all the information and understood there was value in the fundamentals, Nufarm shares recovered. The Ukraine war saw a minimal impact on Nufarm’s overall business. The half-year result of 2022 reported substantial growth in underlying earnings, a reinstated interim dividend and a positive outlook reaffirmed by management. We remain optimistic about Nufarm.
Sale of shares from Sumitomo
Sumitomo decided to its 15.9% shareholding in Nufarm last Monday night. The sale ended Sumitomo’s 12-year stint on the Nufarm’s share register, bringing investors’ confidence down, which caused some waves in Nufarm’s share price the next day.
Traceback to 12 years ago, Sumitomo acquired a strategic stake of 20% in Nufarm in April 2010 for $14 a share and used the connection to help tee up commercial agreements that saw Nufarm distribute Sumitomo products in selected markets. Sumitomo’s deal came after Nufarm rejected a $12 a share takeover offer from China’s Sinochem.
Pleasingly, the crop protection business is important to both companies, and they will continue their mutually beneficial business alliance post-Sumitomo exits Nufarms’ share register. Overall, Sumitomo’s exit doesn’t impact the fundamentals of Nufarm, in our view.
Ukraine & Russia business update
In late April, Nufarm informed investors that the FY21 contribution to underlying EBITDA from Russian and Ukrainian operations was not material and that the total maximum exposure in terms of inventory and receivables were less than 2%.
Nufarm currently expects to raise a one-off $30 – $40 million provision (pre-tax) in relation to the geopolitical uncertainty. This provision will be expected to be non-recurring and to be reported as a significant item, and therefore, it would not impact underlying earnings. We are very content that Nufarm had this disclosure on this front, which helped dissipate investors’ concerns.
1H22 Result Review
For the half-year ended 31 March, Nufarm delivered a thriving result with group revenue at $2.2 billion, increasing 31% on the prior correspondence period (pcp). Crop Protection posted strong results across key geographies with a 26% growth in revenue to $1.80 billion, accounting for 82% of Nufarm’s total revenue. Seed Technologies continue to hit strategic milestones and provide significant growth opportunities for Nufarm, increasing 28% in revenue to $183 million.
Source: Nufarm
Underlying costs increased by $45 million compared to the pcp across some expense categories, including underlying SG&A costs associated with supporting growth opportunities in respect of Nuseed and Crop Protection. R&D expenditure saw a reduction by $3 million compared to the pcp.
Group underlying earnings before interest, tax, depreciation and amortisation (uEBITDA) of $330 million was up 41% on pcp. Underlying net profit after tax surged by 112% to $133 million on pcp. Management has noted that the full year uEBITDA will be anticipated to be proportionately more skewed in the first half compared to pcp, given the elevated forward sales due to the uncertainty and volatility.
Crop Protection delivered an overall 40% increase in uEBITDA with a margin of 14.3%, slightly squeezed from pcp of 15.5%. North America achieved extremely high growth of 184% in revenue and 351% in uEBITDA, reflecting strong commodity prices and favourable seasonal conditions have underpinned demand for crop protection products.
Source: Crop Protection – North America
For Seed Technologies, the segment saw a stronger first half demand for Nuseed’s hybrid canola varieties in Australia, South America and Canada, Sorghum and Sunflower in key global markets. Seed Technologies posted a 24% growth in uEBITDA and a margin of 24.9%, slightly unperformed pcp of 25.7%.
Source: Nufarm – Seed Technologies
Overall, Nufarm’s balance sheet remained strong with net debt of $494 million, reduced by 6% from pcp, primarily due to the improved EBITDA performance. It was leveraged at 1.1x net debt to uEBITDA, down 0.3x on pcp, below its target range of 1.5x – 2.0x.
The Board also declared an unfranked interim dividend of 4 cents per share, the first interim dividend Nufarm has paid since 2018. We are very content with this dividend and expect it will constantly come with growth in the future.
Outlook
In the medium-term, the outlook for soft commodity prices remains positive due to the ongoing geopolitical crisis, COVID disruptions, and inflationary pressure, which will continue to benefit Nufarm. Improved seasonal conditions in key grain producing regions will also result in stronger demand for crop protection products. In the long-term, Nufarm will benefit from a growing population and a megatrend of plant-based protein by consumers. The world’s population is growing fast, with a projection of 9.7 billion from a current 7.8 billion, which means that food production needs to increase by 70% by 2050, placing pressure on food quantity and quality standards.
Overall, we think Nufarm will continue to perform on ongoing momentum in agricultural commodities and the shift to a plant-based protein trend by consumers and record grain prices.
Consequently, we will maintain our buy recommendation for Members with no exposure to Nufarm. Â
Disclosure: Interests associated with Fat Prophets declare a holding in Nufarm.
