Calm the Farm, page-17

From trash to treasure is probably a good way to describe the Nufarm Limited(ASX: NUF) share price over the past two days.

Nufarm is the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today with its 6.2% bounce to $4.49 followed by the Speedcast International Ltd(ASX: SDA) share price and Ardent Leisure Ltd(ASX: ALG) share price in second and third place, respectively.

Sentiment in Nufarm stands in sharp contrast to yesterday. The NUF share price tumbled to the bottom of the ASX 200 leader board on Wednesday when it suffered a more than 20% crash on the back of its profit warning and suspension of its interim dividend.

Should you sell Nufarm?

But top brokers aren’t giving up on the embattled crop protection and seed products group as they continue to think that Nufarm is oversold even as management cut its FY19 earnings before interest, tax, depreciation and amortisation (EBITDA) to between $440 million and $470 million (from $500m-530m).

Worries that Nufarm will need to do an emergency capital raise and news of a second trial against its peer Bayer on the use of glyphosate (the active ingredient in Bayer’s and Nufarm’s weed killing products) also didn’t help.

But Citigroup isn’t worried about the health of its balance sheet and has reiterated its “buy” call on the stock even as it cut its price target by a buck to $6.20 a share.

Brokers sticking with their “buy” calls

“Management confirmed that banking covenants are structured to accommodate seasonal swings in the business. Furthermore, NUF has accelerated supply transition arrangements for its EU-acquired assets, initiated performance improvement program in Australia, and will focus on driving a significant reversal of the sharp 1H19 working capital build, largely from receivable collections (NAM, LATAM) and inventory sell-through,” said the broker.

“Non-core asset sales and dividend suspension could provide further proceeds of $30-50m, by our estimates.”

Deutsche Bank has also kept its “buy” recommendation on the stock as it lowered its valuation by 5% to $5.70 a share, but the broker acknowledged that the risk of a capital raising has grown.

“The downgrade to full year earnings and cashflow guidance was greater than anticipated, which has heightened the balance sheet risks yet again,” said Deutsche.

“While the reduction in Australian ($30m) and European ($30m) earnings appears to be seasonal and transitory, earnings and cashflow guidance is predicated on normal seasonal conditions, which may not eventuate.”

Meanwhile, Morgan Stanley thinks the stock is oversold and pointed out that Nufarm is trading at a 29% to other industrial stocks (excluding financials).

“This discount widens to 50-55% in FY20e/FY21e, materially worse than NUF’s five-yeat average discount of ~20-25%,” said the broker, which kept its “overweight” recommendation on the stock with a price target of $7.10 a share.

Credit Suisse is another that thinks the sell-off in Nufarm is an opportunity to buy the stock.

“We believe that there is a value opportunity on the basis that the market significantly over-weighting weather-driven fluctuations in earnings,” explained Credit Suisse.

“There is ~A$40mn of weather related impacts in our Australian forecast. Even with some risk adjustment to that figure and A$30mn of transitional sourcing impacts in Europe, would suggest underlying EBITDA of above A$500mn.”

The broker has a target price of $8.90 on Nufarm.