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The Market
Nufarm – A good result
The FY-24 results for Nufarm, the global crop protection and seeds business, and Top 10 position in clients’ Australian shares sub-portfolios, were released last week. The results were good and by yesterday the stock’s price had risen by 10%.
[Note: Nufarm has a September financial year end and hence its reporting calendar is out of step with most listed companies.]
The market was especially cautious about the result given the company had downgraded its earnings expectations in August. But the result was at least as good as expected, and compositionally ahead of market expectations. The outlook the company provided, along with the details provided in the accompanying commentary, offer assurance for future profit growth.
Deeper Dive
The short-term highlight appreciated by the market was the strong performance on cash conversion (turning accounting profit into actual cash), and signs of stabilisation in selling prices. Cash conversion went hand in hand with a working capital of 30% reduction on prior year, reflecting inventory reduction, normalisation of payables and strong receivables collections.
This reduced pressure on the balance sheet and provides comfort that the narrative outlined by management in recent reporting periods with respect to working capital is supported by operating outcomes.
The strong cash conversion was, however, achieved in a period of declining operating incomes, driven mainly by weaker Crop Protection (CP) pricing. The following chart shows the revenue bridge from FY23 to FY24 and is characterised by higher volumes, supportive of long-run value creation, but weaker revenue due to “mix” (cheaper products sold) and lower selling prices “CP Price”).
Nufarm FY24 Revenue Bridge – Strong volume growth but weaker pricing
Source: Company reports
Weak selling prices are cyclical in nature and are expected to improve, providing support for future earnings, especially if volume growth is maintained.
We are attracted to Nufarm because of a combination of short and long-term factors, including earnings upside from the normalisation of selling prices and continued demand growth. Tied to the trading business that sells around $3bn of crop protection products worldwide is a technology-rich business in developing new Seed Technologies.
Managing the longer-term investment case
Over the past year we have spent considerable time evaluating the likelihood of Nufarm being able to jointly manage (a) the demands of running a capital-heavy, working capital-hungry trading business in Crop Protection; and (b) at the same time as developing, nurturing and investing in the full range of options that the company also owns in Seeds Technology.
As an investor it is often easier, and definitely much clearer, to own businesses with sub-parts that have similar growth outlooks, capital requirements and inherent value. In Nufarm’s case the two businesses, Crop Protection and Seeds Technologies are very different, despite having similar clients and needing similar supply chains.
Crop Protection
Crop Protection is a slower growth, very competitive business that can often rely on expensive and aging manufacturing plants and is subject to significant swings in Active Ingredient i.e. input prices. It faces significant competition and price pressures from China and India, and in our view is likely to be subject to ongoing political and trade tensions. For instance, Nufarm is already adapting to announced US tariffs on India (8.5%) and China (ranging 17% to 127%, depending on manufacturer). Nufarm notes that its suppliers are at lower end of China tariff range.
Crop Protection in Nufarm is relatively well placed, and likely to navigate regulatory and political tensions with aplomb. For instance, we expect that Nufarm will benefit in the medium term from closer ties with India and Malaysia moving away from China. Nonetheless this part of the business will attract a lower multiple of earnings (PE ratio) than other parts of the ASX due to its growth outlook and high costs.
Seeds Technologies
Seeds Technologies faces much stronger growth rates, has lower capital intensity, higher margins and stronger return profiles. The types of crops already being developed by Nufarm Seed Technologies promises valuable features for famers and consumer alike, they will benefit from future regulatory support and strong global tailwinds. This business is worth a higher multiple, has a lower long-run cost of capital, and should be the beneficiary of higher levels of investment.
Our meetings with the CEO Greg Hunt and his team this week highlighted their commitment to managing this complex task in a nuanced, patience and shareholder value-aware manner. We appreciated the rigorous discussion regarding options the company has at its disposal and came away more confident that our patience over the next 3-5 years will be rewarded in this investment.
We recognise that, given the ASX is currently overly focused on momentum and earnings revisions, the short-term outcomes for Nufarm may remain challenging. We are buoyed, however, that in coming years there is a range of critical positive news events that will help define the long-run value in Seeds Technologies.
Short term trends highlighted in the result
A range of shorter-term trends are worthwhile outlining also. The business remains a relatively complicated set of operations, and incremental decisions regarding investment, pricing, sourcing and marketing-focus all impact short-term earnings in material ways.
In this respect we agree with the company’s assessment that today it is well positioned for growth in Crop Protection as industry conditions improve. Demand is solid, and ingredients’ pricing is stabilising. Growth in canola, sorghum and sunflower seeds was evident in FY-24 and is expected to continue to grow.
Crop prices, and multiple long term demand drivers in food, feed and energy augment a strong outlook over the medium to long term for plant-based omega-3 products. erage age demographic of the people taking out this cover.
Downside from the results – slower roll out of Omega 3 and Carinata
NuFarm noted ongoing Omega 3 pricing pressure and delay in roll out of Carinata due to adverse weather in Latin America. In our view this is a delay in value creation rather than a hit to value creation, but whenever expectations aren’t met the market can take time to adjust.
As a reminder, and as background, Carinata is in our view a critical innovation. For crop and soil aficionados Carinata is called a cover-crop.
A cover crop is a plant that is grown to cover the soil rather than for harvest. Grown on existing farmland, after the main crop harvest and before next season’s planting when fields are typically bare and exposed to erosion and carbon loss, it helps protect land, sequester carbon, regenerate soil, and improve conditions for the following main crop.
Unlike some cover crops which are tilled back into the soil or knocked down with herbicide, the harvested non-food grain is crushed for lower carbon oil to replace fossil oils and the remaining meal supplies a plant-based non-GMO high protein co-product.
Nufarm remains good value
We believe that the Nufarm share price should trade closer $6 per share than its current $4.11 price and look forward to appreciation in coming years.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.