Nufarm Update

ISIN: NZFCND0004S9

We think the Nufarm AUD Perps (ASX: NFNG) are a fantastic buy and expect management to opportunistically look to refinance the outstanding USD bonds and use some of the extra proceeds to redeem the AUD perps. By refinancing the USD bonds, profitability will benefit from lower coupon payments and make the capital structure significantly cleaner.

As an investor, we recommend buying the Nufarm AUD Perps up to 97/98px, given that the probability of redemption is significantly higher over the next 12-24 months. A redemption in May 2022 or May 2023 would translate into an exceptional yield to call of 30% or 10% respectively.

However, even if the notes are not redeemed, we still see value from a carry perspective in holding these securities.

On the back of exceptional performance, Nufarm was upgraded to BB from BB- by S&P (so the issue is upgraded from B to B+). The upgrade also reflects the company’s improved financial profile, working capital management, and cashflow generation.

Nufarm reported revenue of AUD3.2bn, which was 10% higher than the prior comparable period (pcp). Positively, there was earnings growth in every business division, which translated into an underlying NPAT of AUD61m (compared to a AUD73m loss in FY20). While key concerns of imminent supply challenges (which are not isolated to Nufarm) and raw material cost pressures remain, the company has a strong balance sheet and is well positioned to meet any operational instability.

Furthermore, APAC and North America both look set to have strong volume and price growth, which should hopefully act as an offset to supply chain issues. Seed technologies remain a key potential earnings driver, with growth in Carinata expected this year.
The expansion of the seed technology arm of the business will provide diversification for the company’s revenue stream − which is currently 85% herbicides and insecticides. Revenue growth in FY21 was driven by higher prices of soft commodities, while volume was relatively unchanged from the pcp.

Population growth was briefly shocked by COVID-19, but a return to robust population growth, especially in Europe, will drive higher volumes and more stable cashflows. The outlook for FY22 is positive for soft commodities, as conditions have been good for the H1 2021 crop season.

A bumper FY21 also supports our view that Nufarm has capacity to refinance the USD 2026 bonds in April 2022 at a lower rate. Given that economists and traders are pricing in multiple cash rate hikes in 2022 and 2023, it would be prudent for Nufarm to refinance ahead of the curve while the cash rate and benchmark rates are still low.

Given also that the majority of economists expect the Fed cash rate hike to come by June 2022 with a consensus for a 25bps rise, we view an opportunistic refinance to occur in April 2022 as being quite high.

The USD 2026 bonds have a fixed coupon of 5.75% on USD475m outstanding and can be called on 30 April 2022 for 101.44% of par or on 30 April 2023 for 100% of par. At a yield to 2022 call of 4% and to 2023 call of high 3% (both before tax), it would be a rational decision to refinance.

The avenues in terms of a refinance and then redeeming the Nufarm AUD perps are entirely dependent on the interest rate cost of the refinance. However, currently it would make sense to refinance the USD 2026 bonds and then redeem the AUD perps − which have a higher relative cost, with a yield of 6% based on current swap base rates.

The Nufarm AUD Perps are issued by Nufarm Finance (NZ) Limited and have an S&P issue rating of B (S&P issuer rating of BB-). These securities are perpetual, subordinated, and have discretionary distributions which are non-cumulative (however, Nufarm cannot pay dividends if a distribution has not been made).

The margin is 6MBBSW+3.9% with distributions paid semi-annually. Noteholders may only request a redemption if an acquisition event occurs. The notes rank junior to certain other Nufarm facilities, including the company’s senior syndicated bank facility of AUD555m and its receivables securitisation facility.

Currently, the bonds are trading around the 93px with a yield of 6% based on current swap base rates. The bonds have been trading up since the beginning of 2021 (when they were 80px). Please also note: the Nufarm Perps are perpetual and so we must make an assessment on time to call to provide relative value − we use five years.

In our view, the Nufarm Perps offer fair value versus other high-yield opportunities in the market. The closest rated comp is the Emeco 6.25% 2026s (B+/B1), which has a yield to maturity of 6% and is one-notch higher rated.

(Includes FY21 Financials)
Note: FY20 financials heavily impacted by COVID-19 for comparable purposes.

Source: IAM Capital Markets

Currently, the bonds are trading around the 93px with a yield of 6% based on current swap base rates. The bonds have been trading up since the beginning of 2021 (when they were 80px). Please also note: the Nufarm Perps are perpetual and so we must make an assessment on time to call to provide relative value − we use five years.

In our view, the Nufarm Perps offer fair value versus other high-yield opportunities in the market. The closest rated comp is the Emeco 6.25% 2026s (B+/B1) which has a yield to maturity of 5.5% and is one-notch higher rated.

For context:

• If the notes are redeemed in May 2022, this would equate to a yield to call of around 30%
• If the notes are redeemed in May 2023, this would equate to a yield to call of around 10%

However, even if the notes are not redeemed, we still see value from a carry perspective.

Source: IAM Capital Markets

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