Who is giving NUF a favourable report? Anyone know? and what does it say?
.All's far from well down on the farm as Nufarm withers Bryan Frith From: The Australian July 21, 2010 12:00AM Increase Text SizeDecrease Text SizePrintEmail Share Add to DiggAdd to del.icio.usAdd to FacebookAdd to KwoffAdd to MyspaceAdd to NewsvineWhat are these?NUFARM'S response to the ASX suggests that the company has inadequate management information systems or inadequate management, or both. The company has an appalling record. It has announced at least five earnings downgrades over the past 18 months -- including downgrades shortly after its two most recent capital raisings -- a $300 million institutional placement in May last year, underwritten by RBS and JPMorgan, at $11.25 a share and, in May this year, a $250m 1-for-5 entitlement offer at $5.75 a share, underwritten by UBS.
On both occasions, Nufarm had confirmed its previous guidance at the time the issues were announced, so the downgrades came as a shock.
It's worth having a brief look at the record.
In December 2008, at the annual meeting, Nufarm confirmed earlier guidance of an operating profit for the year to July 31, 2009, of between $220m and $230m.
Start of sidebar. Skip to end of sidebar. Related CoverageASX queries Nufarm after profit warning The Australian, 5 days ago Nufarm talks to banks on breach The Australian, 6 days ago Nufarm plunges on bank covenant woes The Australian, 6 days ago Nufarm dives on profit downgrade Adelaide Now, 6 days ago Nufarm accepts offer The Australian, 12 Apr 2010 .End of sidebar. Return to start of sidebar. On May 15, 2009, when the $300m placement was announced, the company believed that guidance could be achieved. But only weeks later, on June 16, Nufarm said that on then current projections it expected to miss the $220m bottom end of the range by about 15 per cent. That would have taken it down to $187m.
On July 24, Nufarm announced an approach from Sinochem and in response to an ASX query said there was a risk the profit might be more than 10 to 15 per cent below the newly revised guidance, which would have taken it down to $159m to $168m.
On August 27, in response to an ASX price query, Nufarm disclosed that it was then expecting an operating profit in the range of $135m to $145m, a further decrease of 13.6 per cent to 15 per cent. In the event, Nufarm met its July 24 guidance, reporting a 2009 profit of $159.6m. The directors said they were confident of a much improved result in 2010. In December, at the annual meeting, chief executive Doug Rathbone said the company remained confident of a considerable improvement on 2009.
That month, Nufarm rejected an offer from Sinochem, which reduced its offer price from $13 a share to $12 a share after conducting due diligence, opting for a deal with Sumitomo Chemicals to acquire a 20 per cent shareholding, via a tender offer to shareholders at $14 a share, to be followed by a $250m equity offering.
On March 2, when shareholders voted on the Sumitomo deal, Nufarm shocked the market by disclosing that it was expecting a loss of $40m for the half year, but also expected a strong recovery in the second half, to produce a full-year profit in the range of $110m to $130m. The forecast assumed at least average climatic conditions and subsequent demand in the key selling regions and a gradual improvement in glyphosate margins.
In April, when the $250m equity issue was launched, Nufarm confirmed that it expected to achieve its latest guidance, but last week, true to recent form, Nufarm halved the full-year forecast to a range of $55m to $65m. As a result, the net debt has blown out by $100m, to $450m, and the company belatedly disclosed it was in breach of its interest cover covenant and had been forced to seek a "temporary adjustment" to the interest cover ratio from its bankers.
The ASX requires companies to make disclosure when the profit is expected to vary by more than 15 per cent. Not surprisingly, the ASX wanted to know when Nufarm first became aware that the profit would be more than 15 per cent lower than the previous guidance.
In response, Nufarm said the final quarter was typically the key sales and profit-generating period (it made the same point in 2009 in relation to its series of profit downgrades close to balance date) and that, contrary to its assumption, the climatic conditions in the key markets were unfavourable.
Nufarm claims the impact of those unfavourable conditions "was not, and could not be" fully appreciated until the preliminary financial data for June was received and analysed, which took until mid-July.
The data for May did not "specifically" indicate there would be a departure from the previous guidance and it was not until the July results were examined that the company was aware the result would vary by more than 15 per cent from guidance.
So by mid-June, when the May results would have come to hand, Nufarm didn't know its earnings would be more than 15 per cent lower than the guidance yet by mid-July it expected it would be 50 per cent lower. That is, Nufarm didn't know the likely profit outcome until two weeks before the end of the final quarter.
It suggests, at the very least, that the company's management information systems are hopelessly inadequate.
Nufarm knows the importance of the final quarter and it could therefore be expected that it would have gone to great lengths to try to ensure that its information systems would enable it to have a timely grip on how things were panning out.
That would suggest at least weekly management accounts yet, from its responses, Nufarm appears to have been working only monthly accounts.
Moreover, the unfavourable climatic conditions during the quarter could not have been a surprise as they would have been observable throughout the period. Nufarm must have known that would have an adverse impact on its earlier guidance but it seems to have been unable to quantify the impact until the 11th hour.
Nufarm has now implicitly conceded that its information systems are deficient. It says it is concerned at its ability to identify, and react to, changed market conditions and is revisiting the systems it has in place.
But for their chronic over-promising and under-performing, there must also be a question mark over senior management, in particular Rathbone and chief financial officer Kevin Martin who has been responsible for finance, treasury and tax matters since 2000.
It should be remembered that in December 2007, China National Chemical Corp decided not to proceed with an offer of $17.25 a share and in December last year Sinochem reduced its offer from $13 a share to $12 -- in both cases after conducting due diligence.
It's suggested that in both cases the Chinese were much more bearish than Nufarm about the outlook, in particular for the price of glyphosate.
Nufarm's shares have plunged following the latest earnings downgrade and were down to $3.25 on Monday. They rallied 17c yesterday to $3.42, on a favourable broker report, but at that price shareholders who took up the recent entitlement offer at $5.75 a share are down $2.33 a share, or 40 per cent.
Sumitomo must be deeply unhappy as its 20 per cent stake cost it $685m and is now worth only $191m: a loss to date of a staggering $494m, or over 70 per cent.
(20min delay)