Nufarm Ltd (ASX: NUF) is a major producer of crop-protection products (herbicides, fungicides, and pesticides) and sells these products into all major world markets. In the Australia, Nufarm is a leading supplier in each of its core products. Nufarm has a market capitalisation of A$1.6 billion
What are the key points from Nufarm HY20 results?
Revenue for HY20 is A$1,477 million, down 6% compared with the corresponding period. Underlying earnings before interest tax depreciation and amortization (EBITDA) for HY20 is A$66 million, down 45% compared with the corresponding period. Underlying net profit after tax (NPAT) (before material items) for HY20 is a loss of A$85 million, up 639% compared with the corresponding period. Interim dividend is suspended.
What are the drivers of this result?
Nufarm’s Europe business saw an increase in revenue and market share gains in key cereals markets. However, earnings in Nufarm’s European business was restrained due to strong competition, increasing manufacturing costs and raw material costs from Chinese suppliers remain high, reducing margins on foundational products Nufarm’s North American business saw a large contraction in revenue. This is attributed to weak demand due to channel de-stocking, demand in crop protection markets impacted by adverse weather and tariffs, leading to high channel inventory and a challenging period for both the US and Canadian Crop Protection segments. In addition, similar to Europe, strong competition in an oversupplied market impacted margins.
Nufarm’s Australia business saw a contraction in revenue since FY17 and was especially affected this financial year. This is attributed to reduce demand in Australia with limited sales into summer crop markets due to continued drought and fire conditions. A shining light in Nufarm’s Australia business is that the late half of January and February experienced rainfall, resulting in a spike of demand post half year end. However, follow up rain is needed to support planting intentions. In addition, supply constraints on some products depending on timing of arrival of shipments from China post COVID-19 delays.
Nufarm’s Asia business saw a contraction in revenue. This is attributed to reduce demand in Indonesia due to prolonged drought and high channel inventories.
Nufarm’s South American business saw an increase in revenue. This is attributed to strong demand for crop protection products in Brazil and increase soy plantings.
What is the outlook for Nufarm?
Nufarm’s prospects are always subject to weather conditions. Nufarm has reported challenging weather conditions in the corn and soybean producing areas of the United States, Australia and Asia, which could mean less spraying this financial year.
On the upside, Nufarm is on track to be first to market with a sustainable, scalable, alternative source of long chain Omega-3. Further, Nufarm Omega-3 expects FY21 oil volume production target to be more than double, which should have a positive effect on Nufarm’s future earnings.
What is the market reaction?
The market reaction to Nufarm’s HY20 report is positive. Nufarm is up around 10% and is currently trading at A$4.63. However, this may be attributed to the fact that the Australian market is up today. Nufarm have a forward P/E ratio in the low twenties.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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