2020 a year in review_bourse | Page 11

COMPANY NEWS & UPDATES

Nufarm Limited ( NUF )

Buy Valuation $ 7.00

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Easing Raw Material Costs & Improving Weather

We make no change to our valuation for Nufarm . The company had a disappointing year to July 2020 , with underlying EBITDA in continuing businesses down 21 % to $ 236 million . But this was a year of the “ perfect storm ”. While the company ' s products are essential inputs to the agricultural industry , and therefore somewhat resilient to COVID-19 , related supply chain disruptions improved , though are still net unfavourable , while weather conditions overshadowed . But improvement is at hand .

Nufarm reported more favourable trading conditions recently , though reporting of these could be somewhat confused by a change in financial year end . Following the sale of its South American business , earnings are very heavily weighted to the old fiscal second half . Changing the financial year end to Sep . 30 better aligns half year reporting with key sales periods , and makes comparison to industry peers easier . We have not yet rolled our financial model over from the old July year end , pending release of full prior period comparatives . But it ' s safe to say things are improving , in accord with our unchanged increase in FY21 EPS forecast to July of $ 0.40 , versus negative $ 0.19 actual in FY20 .

Our confidence to report such a turnaround is buoyed by recent commentary . Nufarm says the two months to September 2020 generated revenue growth of 23 % on the pcp driven primarily by stronger demand in Australia and Europe . And for October and November 2020 , revenue increased 47 % on the pcp with growth in all regions and in Seed Technologies . While cycling from a very low bar , the large percentage revenue increase is regardless encouraging .

Nufarm shares are up materially from $ 3.40 October 2020 lows , but at $ 4.20 remain materially undervalued .

We think the market is too conservative in wanting to see convincing recovery in net operating cash flows from FY20 ' s low ebb . Shell-shocked by the mixed seasonal conditions , industry-related supply issues and disruption from COVID- 19 , we think the market is overly negative on the outlook for Europe , the region admittedly having provided a litany of problems for Nufarm since major acquisitions in FY18 . Nufarm ' s focus in the short term is driving value from its European business . It will cease manufacture of 2,4-D herbicide in Austria , which in conjunction with closure of insecticide and fungicide manufacturing in Australia in 2021 , is expected to save in the order of $ 15 million per year from businesses whose competitiveness had been eroded . Elsewhere it will expand its manufacturing footprint , including the start of a new formulation facility in Mississippi . Longer-term , Nufarm targets $ 20 million- $ 25 million of improvement , including $ 10 million- $ 15 million from Europe .

Our valuation equates to an unchanged FY25 EV / EBITDA of 6.0 , and P / E and dividend yield of 15.2 and 2.2 %, respectively . We forecast 17.5 % five-year EBITDA CAGR to $ 604 million by FY25 and a midcycle EBITDA margin of 17 %. FY20 EBITDA margin came in at just 7.7 %, recovering to 11 % in the second half from 4 % in the first , but well below our midcycle expectations .

Nufarm favourably finished the fiscal year to July 2020 with just $ 296 million in net debt , modest gearing of just 12 % and conservative sub-1.0 net debt to EBITDA , reflecting $ 1.2 billion in net proceeds from sale of Nufarm South America to Sumitomo in April 2020 . And we expect Nufarm to be unleveraged within two years , all else being equal . We think it wise for the company to remain modestly leveraged at most , given vagaries of the weather , earnings seasonality , and new product rampup requirements .

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