macquarie report

Nufarm

Receivable dispute at pointy end

Event

NUF has entered into discussions with a major supplier regarding certain outstanding receivables from 2009-2011. The discussions may result in a compromise of the dispute, which would affect the book value of the receivable recorded by NUF and prompt a writedown against operating profit in FY11. In other words, any provision is likely to be taken "above the line" given associated P&L impact was also booked above the line previously.

NUF's 1H11 accounts disclose a $58.9m receivable with respect to a claim that a major supplier is liable for a relevant share of losses attributable to the sale of product during the 2009 and 2010 financial years, and the 2011 interim period. The parties entered into an agreement in 2002 that provides for the sharing of costs and proceeds associated with NUF's sale of products.

Impact

Potential receivables writedown is a non-cash item as cash outflows associated with the losses (some of which NUF expected to recover from the supplier) were incurred in prior periods.

Interest cover tightens but still looks to be adequate headroom even assuming a full writedown of $59m receivable (unlikely in our view). Our current forecasts imply interest cover of 4.7x EBITDA. The worst case scenario is NUF writes off the entire $59m receivable, which would see interest cover of 3.6x (last year's cover was 3.4x and 3.7x in FY09). We think this outcome is unlikely otherwise NUF would have proceeded to an arbitration hearing as originally planned. If we assume a $30m writedown instead, interest cover falls to a more comfortable 4.1x EBITDA. However, as always, much still depends on a stronger 2H operating performance.

Australia looking good . Elders' recent 1H11 result and outlook commentary is a positive indicator for NUF's 2H in Australia. ELD noted very good seasonal conditions in Eastern Australia. The west has been very dry; however, most wheat growing districts in WA received falls of 20-40mm over the past week, which should kick-start planting. This should provide a much needed boost to NUF's sales in the West (30% of Aust sales). However, follow-up rain will be required.

North America and Europe plantings have been slow to start due to adverse weather, however plantings in the US have recently fired up. Weather outcomes in these geographies over the next six weeks will be important to NUF's 2H performance. Encouragingly, the pricing/margin environment is improving, particularly in phenoxy herbicides, although conditions remain competitive in glyphosate.

Earnings and target price revision

No material change to earnings. Lower net interest offset by slightly lower Europe/North America earnings.

Price catalyst

12-month price target: A$6.00 based on a Peer valuation methodology.

Catalyst: 2H seasonal conditions in WA, North America and Europe

Action and recommendation

Outperform, $6.00 target price.