An old piece in the Fin (from 2019)
https://www.copyright link /chanticleer/nothing-fishy-in-nufarm-s-omega-3-20190314-p514an
Nothing fishy in Nufarm's omega-3
Crop protection company Nufarm could be sitting on a $1 billion omega-3 gold mine.
Two years of drought conditions have not only smashed the share price of crop protection company Nufarm they have exposed the potential $1 billion in hidden value inherent in its unique omega-3 canola varieties.
If the portfolio managers and broking analysts are right then up to half of the current $2 billion market capitalisation of Nufarm can be attributed to its Nuseed subsidiary, which is developing and commercialising omega-3 canola in partnership with the CSIRO and the Grains Research & Development Corporation.
This is one of the great untold technology breakthroughs to come out of CSIRO after more than 15 years of focused research led by Dr Surinder Singh and co-ordinated by Dr James Petrie. The canola being grown by Nufarm in trails in the United States has achieved levels of docosahexaenoic acid (DHA) comparable to levels found in bulk fish oil.
This is the world’s first plant based source of long-chain omega-3 fatty acids. It has regulatory approval in Australia and from the US Department of Agriculture. The truly dramatic breakthrough will come if the US Food and Drug Administration gives its approval for human consumption.
Respected analyst Craig Saligari from Credit Suisse late last year put a value on Nufarm’s omega-3 canola of $2.08 a share or $790 million. Substantial shareholder Firetrail Investments, which owns 6.7 per cent of the stock says it is worth $1 billion.
“Nufarm’s omega-3 canola development presents a compelling combination of market growth, constrained supply, limited alternatives, a cost of production advantage and patent protection,” Saligari said while putting a $10 price target on the stock.
Nuseed and its partners, CSIRO and GRDC, appplied for and were granted 20 additional patents in the year to July 31, 2018. It is a measure of the company’s technology leadership that it has filed US federal court proceedings against BASF and Cargill claiming infringement of 16 of its patents for their activities in the US.
Commercial production of omega-3 canola is expected this year.
Nufarm’s third largest shareholder, Firetrail Investments, believes the omega-3 technology will be worth $1 billion or about half the value of the entire company if the FDA grants approval for human consumption.
The second largest shareholder in Nufarm is Ashok Jacob’s Ellerston Capital, which owns 12.6 per cent of the stock. The largest shareholder is Sumitomo Chemical with 15.9 per cent. Sumitomo’s strategic stake virtually guarantees the Japanese company access to Nufarm’s global crop protection supply chain.
One reason for owning Nufarm shares is the real possibility of corporate action as part of a broader global consolidation in the agriculural chemical industry.
Over the past two years there have been mergers and acquisitions worth about $354 billion, according to data compiled by Goldman Sachs.
Chatter about a possible Nufarm takeover has gained in volume over the past few weeks partly because about 5 per cent of the issued capital was traded. Chanticleer believes there has been interest in the stock from a Hong Kong based investor with a history of participating in takeovers.
It would be typical of the history of technology breakthroughs by the CSIRO if a foreign investor snapped up Nufarm to benefit from the worldwide commercialisation of its omega-3 canola. Australia has a track record of inventing things and letting others enjoy the fruits of our scientific labour.
The large scale terrestrial production of long chain omega-3 oils will be essential if the world is to feed the expansion of the aquaculture industry in response to the heavy pressure on global fish stocks.
Nufarm shares are trading near a four year low largely because of the impact of the drought on its Australian crop protection business. This says a lot about how poorly understood the company really is.
Only 6 per cent of its earnings before interest, tax, depreciation and amortisation from crop protection came from Australia and New Zealand in 2018. About 90 per cent of EBITDA came from Europe, North America and Asia.
Under chief executive Greg Hunt, Nufarm has shed its reputation as a poorly managed company with a propensity for unexpected profit downgrades. The company’s interim results are due out on Tuesday.
There is an expectation it will not meet the upper end of its market guidance for EBITDA in 2019 of $500 million to $530 million.
In 2018 seed technology sales were up 10 per cent to $185 million with underlying EBITDA of $43.6 million. If you accept Saligeri’s valuation of omega-3 canola then the market is attributing an EBIT multiple to the rest of Nufarm of 5.8 times.
A research report by Alex Karpos at Goldman Sachs earlier this month said the first EBITDA contribution from omega-3 would be in 2021.
“By 2028, Nufarm estimates that the fish oil deficit will total 850,000 tonnes, with the potential to be supplied from 22,000ha of canola production,” he said. Additionally, NUF forecasts that every 1 per cent share of the 2028 deficit is expected to generate $8.5 million in EBITDA.”
Omega-3 fatty acids are becoming important components of many foods, particularly products sold to China. In a recent market presentation the milk producer Bellamy’s Australia said 74 per cent of Chinese mothers aged 25-35 consider DHA a must have for milk formula.
This explains why Bellamy’s Organic formula now has world leading levels of DHA, which is a long-chain omega-3 fatty acid.
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