Becoming a Bigger Fish
Shares of crop protection company Nufarm (ASX:NUF) have ticked up over the past month, supported by broker upgrades following acquisition activity and expectations the company could be entering a significant growth phase. Nufarm also got a boost last month from Australian regulators approving the company’s GM omega-3 canola for use in feed and human consumption.
The new proprietary product could also have a significant environmental benefit, with one hectare of the canola set to provide the omega-3 yield equivalent to that from 10,000 kilograms of wild caught fish. That approval could pave the way for other countries to follow suit.
The thematic of rising food demand and the need to boost agricultural yields due to the shrinking supply of arable land is supportive for Nufarm’s investment case.
There has been an increasing amount of M&A activity in the sector. This has been a sector-wide trend and we have regularly said during our coverage that Nufarm will play a significant part (either as acquirer or target) one way or another.
In November Nufarm (ASX:NUF) took advantage of the mandated divestiture by the European Commission of certain crop protection assets as part of FMC’s acquisition of DuPont. The crop assets secured from FMC included eight formulations used in broadleaf weed control applications. The approximate $110 million acquisition (plus $6 million for inventory) will help “turbo-boost” the crop protection company’s position in the European market on top of the Century deal (discussed further below).
As we wrote at the time, the deal strengthens Nufarm’s presence in cereals and pasture, and gives it greater exposure to Europe’s cereal crop market. Management noted, “Cereals are the largest crop segment in Europe so these products are a valuable addition to our overall suite of products, offering us excellent cross-selling opportunities with our existing products”.
The business being acquired is expected to generate A$30 million in net sales in the first year of full ownership in fiscal 2019 and A$15 million in earnings before interest, tax, depreciation and amortisation (EBITDA), implying a slightly less than 7.5 times 2019 EBITDA valuation. The portfolio has an attractive near-term growth profile which is driven by new product launches and cross-selling opportunities for existing products. The margins of the products being acquired are also above Nufarm’s existing margins.
Source: Nufarm (ASX:NUF) 2017 AGM
The acquisition come on the heels of the much larger $627 million (plus inventory) acquisition of a portfolio (referred to as the Century portfolio) of European crop protection assets from Adama Agricultural Solutions and Syngenta Crop Protection.
The ‘Century Portfolio’ being acquired is a collection of intangible assets carved out of Adama and Syngenta and consists of over 50 crop protection formulations, including herbicides, fungicides, insecticides, seed treatments and plant growth regulators which are sold in 29 European markets including Germany, Spain, France, Italy, Poland, Romania and Hungary. The top 10 core products account for approximately 70% of net sales from the portfolio. The following graphic highlights some of the characteristics of the portfolio by lead active ingredient, product segment, market and crop.
Source: Nufarm (ASX:NUF)
The Century acquisition will be transformative for Nufarm’s European business, with pre-transaction pro forma FY2017 sales of A$540 million expected to increase by just over a half (+53%) to A$826 million. Market share in Europe will increase, but still be only mid-single digit in herbicides, insecticides and fungicides, giving further scope for growth. The price of the transaction is also reasonable in our view at 7 times FY2019 EBITDA. The deal is expected to be mid to high single digit earnings per share accretive pre-amortisation in the same year. This acquisition has reportedly progressed well and is due for completion anytime now.
Nufarm (ASX:NUF) delivered a solid FY17 result, with sales of $3.111 billion for the year up 11.5% over FY16 and slightly above the consensus forecast for $3.0 billion, according to analysts surveyed by Bloomberg.
The company benefitted from higher sales in both the core crop protection segment and the smaller seed technologies segment.
Crop protection sales increased approximately 11% to $2.94 billion. Looking at some of the major categories within the segment and herbicide sales increased roughly 10% to $1.95 billion, insecticide sales surged 18% to $34 million and fungicide sales were up 8% to $335 million. The seed technologies segment is smaller, but grew faster over the period, with sales up 17% to $168.6 million.
Underlying EBITDA (earnings before interest, tax, depreciation and amortisation) was up 4.9% year-on-year to $390.0 million and at $302.3 million underlying EBIT (earnings before interest and tax) increased 5.4% over the FY16 result of $286.7 million.
The company noted that both the underlying EBITDA and EBIT results for the year were curbed by foreign exchange movements and on a constant currency basis both EBITDA and EBIT increased 9%.
Source: Nufarm (ASX:NUF)
Moving down to the bottom line and at the group level, statutory net profit after tax (NPAT) jumped 316% to $114.5 million. The FY17 statutory result includes the impact of $23 million in pre-tax one-off restructuring and asset rationalisation costs. Excluding one-off items, FY underlying profit was up 25% from the prior year to $135.8 million. Underlying earnings per share increased 27% to 46.7 cents.
The Board of the company declared an unfranked final dividend of 8 cents per share, taking the full year dividend to 13 cents. That marked an 18% increase from the 11 cents per share (unfranked) paid in for FY16.
Nufarm’s performance improvement program delivered an incremental net EBIT benefit of $26 million and remains on track to “deliver at least $116 million by FY18.” The benefits of this cost-out program were a core plank in our initial investment case for Nufarm, and we have been generally content with its progress to date.
Source: Nufarm (ASX:NUF)
In terms of the outlook for the current year and at the time of the 2017 AGM, after a weaker trading result in November, mainly in Latin America, along with scheduled plant shutdowns, first half 2018 EBIT was expected to be in the range of $70 to $80 million. For the full year, the company is forecasting “underlying EBIT growth on the prior year (excluding acquisitions).”
Summary
Nufarm (ASX:NUF) has been the ‘hunter’ in the consolidation of the crop protection industry in recent months, securing two attractive deals which will turbo-charge the company’s position in Europe. With consolidation set to continue in the years ahead, the company may also find itself being the ‘hunted’ at some point. Meanwhile, we view the thematic favourably. Rising
food demand and the need to boost agricultural yields due to the shrinking supply of arable land is supportive for Nufarm’s investment case.
The shares trade on 17.2 times estimated 2018 earnings, expected to fall to 13.9 times the following year.
We continue to rate Nufarm (ASX:NUF) as a HIGH CONVICTION buy for Members without exposure.
Disclosure: Nufarm (ASX:NUF) is held in the Fat Prophets Concentrated Australian and Small & Mid-Cap Model Portfolios.
