Nufarm: Material value will be unlocked over coming years

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

04 February 2022, 9:00 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• Nufarm's (ASX:NUF) Investor Day released its FY26 aspirational growth targets. If realised, this would equate to 37-43% sales growth and 73-81% EBITDA growth off the FY21 base. These targets are materially above consensus estimates.
• Importantly, 1Q22 is off to an extremely strong start and NUF is confident of delivering further earnings growth in FY22. We have upgraded our forecasts. 
• Leveraged to favourable global agricultural trends and with a clear growth strategy out to FY26, we reiterate our Add rating with a new price target of (login to view). Trading on an FY22F EV/EBITDA multiple of only 6.8x, we continue to believe NUF is undervalued.

Event: Investor Day focuses on NUF’s aspirational FY26 growth targets

NUF’s aspirational growth strategy is targeting revenue of A$4.4-4.6bn by FY26. This was much stronger than our previous forecast of A$3.5bn. Visible Alpha consensus was also at A$3.5bn.

To meet this target, NUF is aiming to deliver A$300m of organic growth (market share gains and maintaining pricing discipline) in crop protection products and its pipeline of new product introductions will deliver a further A$500-600m (net of ~A$300m of regulatory losses and product deregistrations). Furthermore, Seed Technologies (mainly Omega-3 and Carinata) is forecast to generate A$400-500m of additional revenue by FY26.

Management said that it is targeting an EBITDA margin of 14.2% in FY26, a 300bp improvement on FY21, driven by improving its volumes, mix (Seed Technologies business is higher margin) and evolving its crop protection portfolio to be more innovative, higher margin and higher growth.

This implies that NUF is targeting FY26 EBITDA of A$625-653m. This is much stronger than our previous forecast of A$484m (now A$498.5m) and Visible Alpha consensus of A$444.4m.

FY22 outlook: off to a very strong start

1Q22 revenue was up 36% on the pcp supported by favourable weather conditions, particularly in Australia and the continuation of strong customer demand in all regions for seeds and crop protection products.

Despite input cost and supply chain pressures, we understand that margins are holding firm given solid volume growth and NUF has increased its prices.

NUF expects earnings in FY22 will be heavily weighted to the 1H22. NUF said that it is increasingly confident of delivering both revenue and earnings growth in FY22. This is a strong outcome given it is comping a big FY21 (delivered 51% EBITDA growth).

Growth will be underpinned by the benefits of its recent investments, performance improvement program and favourable operating conditions.

We upgrade our forecasts

Given NUF’s stronger than expected 1Q22, we have upgraded our FY22 EBITDA forecast by 3.9%. Our underlying NPAT forecast has risen 21.7% reflecting the refinancing of the company’s high yielding bond (reduced face value and lower interest rate) which has materially reduced its net interest expense.

Our forecasts have also risen in outer years reflecting NUF’s growth strategy, however they are materially lower than the company’s FY26 target. In FY22 we forecast 9% EBITDA growth however given the operating leverage in the business, NPAT rises 48%.

Investment view

Our valuation has risen to (login to view). If NUF achieves its aspirational FY26 revenue and EBITDA margin targets and we apply an 8-9x EV/EBITDA multiple (includes a rerating for the higher quality and higher margin Seed Technologies earnings) to the implied EBITDA, the stock could be worth between A$12.92-A$15.23 per share in FY26. At current prices, the mid-point of this range implies an attractive 21% pa compound return over the 5-year period.

We have come away from NUF’s Investor Day with greater confidence in the quality of the business and its outlook (competitive advantages, product portfolio, leverage to favourable macro trends, bench strength and financial discipline).

If its targets are achieved, there is significant embedded value within the business to be unlocked over coming years. We maintain an Add rating on NUF. It is trading on an FY22F EV/EBITDA multiple of 6.8x (material discount to peers on 9-10x).

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.

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