Nufarm: Expecting a strong FY21 result
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 11 October 2021, 9:00 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Nufarm (ASX:NUF) reports its FY21 result on 17 November. We expect a strong result, albeit earnings have been skewed to the 1H (63%/37% 1H vs 2H) given favourable operating conditions and COVID uncertainty/supply chain disruptions.
- Our FY21 EBITDA forecast for 51% growth is led by NUF’s European, ANZ and Seed Technologies businesses which have benefited from much improved operating conditions. NUF is also benefitting from its Performance Improvement Program (PIP) which is lowering its cost base.
- Despite comping a big FY21, we forecast further growth in FY22, albeit it will be 2H skewed, reflecting a more normal seasonal buying pattern.
- Trading on an FY21F EV/EBITDA multiple of only 6.7x, we continue to believe NUF is undervalued. We reiterate our Add rating with a new (login to view) price target.
Event: FY21 result preview – reports 17 November
NUF hasn’t provided formal FY21 earnings guidance. At the 1H21 result, it said that full year earnings will be significantly weighted to the 1H due to early demand and channel restocking in Europe, APAC and Seeds.
Therefore, NPAT in the 2H will be materially lower than the 1H and will likely be a loss.
We forecast a strong FY21 result with sales up 8% and operating EBITDA increasing 51% to A$370.0m (company compiled consensus is A$366.4m). The company is cycling a weak comp.
Due to favourable operating conditions (improved seasonal conditions and high soft commodity prices) and COVID uncertainty/supply chain disruptions, demand was brought forward to the 1H21. In the 2H21, we forecast sales to fall 2% on the pcp and EBITDA to decline 1%, reflecting these issues.
Strong earnings growth in FY21 reflects improved trading conditions and a return to more normal seasonal conditions which has seen increased demand for NUF's products across all of its regions (particularly ANZ where we forecast EBITDA to rise by 67% and Europe EBITDA +66%) and its Seed Technologies business (EBITDA up 68%).
Despite dry conditions, increased costs and a higher AUD, we forecast solid growth (+9% EBITDA) from North America given NUF has had supply of product when some competitors haven’t. Pleasingly, NUF has won market share across several of its key markets in FY21. It has also sold more higher margin products.
Additionally, NUF has benefitted from its PIP, which is lowering its cost base (delivering A$25m of run rate benefits in FY21). Consequently, we expect a strong uplift in key operating margins.
We forecast NUF to report solid operating cashflow, benefiting from improved working capital management and higher earnings. We expect that average NWC/Sales is at the lower end of its target of 35-40% (FY20 was 45%). We forecast gearing (ND/EBITDA) of 1.4x to be below NUF’s target range of 1.5-2.0x.
We forecast a modest final dividend of 2.0cps, unfranked.
We don’t expect NUF to issue FY22 earnings guidance. However, we expect it is targeting further growth (particularly in North America), albeit 2H weighted given it comps a big 1H21. In FY22 we forecast 5% EBITDA growth however given the operating leverage in the business we forecast operating profit to rise 50%.
With the result we are looking for an update on NUF’s ability to get supply of key active ingredients given supply constraints, pass on rising input costs, PIP targets, new product pipeline, the opportunity to scale Omega-3 Canola and Carinata sales and the new CFO/Board’s capital management principles.
Investment view: Add recommendation
With expectations of a strong upcoming result and positive industry fundamentals and self-help measures to deliver a solid earnings recovery over the next couple of years, we maintain an Add rating.
We highlight that NUF is trading on an FY21F EV/EBITDA multiple of 6.7x which is a reasonable discount to international peers on 9.2x. At this multiple, investors are getting the potential upside from NUF’s two biggest Seed opportunities being Omega-3 Canola and Carinata for free, in our view.
Reflecting some more conservative assumptions in FY22 and FY23, our valuation has fallen to (login to view).
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