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NUF – Nufarm

Sometimes the market is said to be like a blindfold person searching in a dark cupboard for a pair of black shoes that isn’t there.

And the futility of that search if often capitulation selling – throwing in the towel believing things can never get better.  Like ever raining again.

The much heralded but failed Blue Sky Investments sold out of its agricultural investment in premium Wagyu cattle, saying drought conditions were worse than would have ever expected, and the costs of hand feeding cattle were too high.

The Bureau of Meteorology expects rainfall for the rest of the year to be below average across much of Australia. Beyond that hope prevails. The BOM’s El Nino-Southern Oscillation (ENSO) outlook remains neutral, indicating neither El Nino nor La Nina. 

The big dry put also the mockers on the big global agricultural chemical supplier NuFarm. When it reported its first half loss, the market wiped more than $500 million off its market cap.  The drought was never going to break, according to capitulation sellers and. Since then the company has restructured its business to prepare for better times, and while there has been recent rain in Eastern Australia, more is needed due to top up very low sub-soil moisture levels in key cropping and farming regions.

Nufarm shares were trading at $4.23. When the company re jigged its balance sheet selling of its South American crop protection and seed treatment operations to Sumitomo for A$1.188 billion the share price hit the afterburners jumping almost to $7.00.  It was a seminal deal for the company – a good price for an asset which had been negative free cash flow for the past five years.

And while forward earnings are trimmed, the Latin American sell gives Nufarm breathing space to concentrate on both its well performing North American and its poorer European cousin.

Australia is more problematic. Trading conditions are challenging. There is a pathway to $50 million EBIT (Earnings before Interest and Tax) in a normal season. But dependant on further costs out of the business and of course rain. A more conservative view is EBIT around $28-30 million in FY 21, rising thereafter. 

Taking a bullish view for Nufarm in the next couple of years with mid to high single digit organic growth in Australia and New Zealand, and valuing the stock at around 18 times P/E suggests a price target of $8.50.

But there are risks that need to be taken into account. If it doesn’t rain and demand is reduced for crop protection products, this will have a knock-on effect for cash flow and working capital. Profits will be affected. Also, there is the bogeyman of litigation risks associated with glysophate which the company sells. In a perfect drought dust storm, this could knock the share price back under $5.00 

Remember however, investors are believing it will only rain after the 12th of never and these seasonally challenged conditions should normalise over time. Also, the current share price we believe does ascribe full value to the potential of NuFarm’s Omega 3 product. This is a proprietary Canola seed for both human and animal feed consumption.

Developed, in collaboration with the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Grains Research and Development Corporation (GRDC), this omega-3 canola is the world’s first plant-based source of long-chain omega-3 fatty acids.

Long-chain omega-3 DHA and EPA are essential for human and fish health. This new proprietary product aims to help relieve pressure on wild fish stocks, which are the current source for this important nutrient. It is anticipated that one hectare of Nuseed’s omega-3 canola has the potential to provide the omega-3 yield from 10,000 kilograms of wild caught fish. Untapped markets for Omega 3 are Europe and America.

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