Matthew Macreadie
Nufarm is a crop protection and specialist seeds company. Nufarm product helps farmers to protect their crops against damage caused by weeds, pests, and disease. Nufarm has manufacturing and marketing operations throughout Australia, New Zealand, Asia, the America’s and Europe and sells products in more than 100 countries.
A large portion of the revenues and EBITDA comes from the crop protection business. The crop protection business continues to see strong demand in key grain producing regions around the globe. Furthermore, the outlook for soft commodity prices remains positive.
Source: Nufarm Investor Report
Nufarm is currently rated BB (S&P) but strong FY22 results and favourable outlook for FY23 could see it climb the ratings scale. S&P metrics for an upgrade from BB+ are a debt to EBITDA ratio below 2.5x and positive cash flow from operations to debt at more than 35%. In our view, there is a strong case for this to occur over FY23. All-else-equal, this would see the Nufarm USD 2030 bonds and NFNG notes outperform other HY lines.
Nufarm have yet again been able to effectively capitalise on a good operative environment over FY22. Supply side constraints drove prices higher, which alongside solid rainfall via La Nina, resulted in a strong result for the crop protection business. Furthermore, Nufarm have done an excellent job in bolstering its balance sheet to plan for softer demand, whether driven by lower prices, poor weather, or both.
Nufarm issued USD 2030 bonds (callable 2025) early this year to term out their debt profile and subsequently redeemed the 2026 bonds. At that stage, there was no early call of the NFNG notes. However, as benchmark yields have continued to widen this year [and dramatically so], the cost of the NFNG notes has risen (i.e., become more expensive for the company). Remember, the NFNG notes are floating rate and currently paying a coupon of 7.4% versus the new USD 2030s at 5%. Thus, while the NFNG notes are perpetual, the company may be inclined to repay them prior to 2025 to reduce their overall funding cost [note this had not originally been part of our thinking in early 2022 benchmark yields have just moved up so quickly].
Source: Bloomberg
Turning back to the results, FY22 revenue was AUD3.8bn with underlying EBITDA of AUD447mn. These values were up 17% and 24% respectively on the pcp.
What was most pleasing from the results, was that the company is generating free cash flow (FCF). After dividends and growth investments, FCF was AUD59mn. The focus on delivery of FCF is an important credit consideration, especially in the high-yield sector. Nufarm has effectively been good at managing its net working capital in what is an uncertain operating environment.
Per the company’s definition, leverage was 0.8x (FY21: 0.9x), well below their 1.5-2x target. Post year end, Nufarm entered an Asset Based Lending credit facility (ABL facility) for AUD800m with an additional AUD150m available in a stand-by facility. It should be noted management has increased dividends and is evaluating other growth and/or capital management initiatives.
Source: Nufarm Investor Presentation
The outlook for FY23 is favourable. Assuming normal seasonal conditions and on a constant currency basis (CC), underlying EBITDA is likely to grow modestly in FY23. Global political and macroeconomic uncertainty has increased awareness that crop protection is a vital component in ensuring global food security. Conditions are such that higher prices are likely to persist, resulting in higher planting volumes and demand for Nufarm’s pesticides. Nufarm’s revenues are linked to acres/hectares planted. In our view, it is now inevitably going to take longer for a normalisation in soft commodity prices, where lower prices feed into lower volumes and sales for Nufarm’s pesticides.
S&P metrics for an upgrade from BB+ are a debt to EBITDA ratio below 2.5x and positive cash flow from operations to debt at more than 35%.
We calculate these two metrics at:
*FY23E is based on consensus values shown in the Bloomberg screenshot below
Source: S&P
Source: Bloomberg
