ord minn have buy on nuf

NUF $4.76
Recommendation
Buy
Risk Assessment
Medium
Materials – Agricultural chemicals

Nufarm
1H13 result preview
? Nufarm are due to report their 1H13 result to the end of January on Thursday, 28 March 2013. In late January, management guided to EBIT being at least 15% up on pcp.

? Key areas of the result will be an update on the outlook statement for FY13 as the business has a large loading to 2H (up to 80% of EBIT), an update on the recent loss of the BASF and Monsanto licenses, and the speed at which
this lost revenue can be filled. It is still early in the Australian, North American and European season, but an update on the early progress will be important.

? The rural press suggest that Nufarm’s new glyphosate brand will be called ‘Weedmaster’ and that two new Australian based formulations are to be launched next month – so clearly the loss of the license has not slowed Nufarm down. Mr Rathbone (the Nufarm MD) was last seen amongst the crops (and weeds) in Moree and we postulate that Sinochem will have its work cut out competing with Nufarm particularly given the season is ramping up now and Sinochem needs to be operational very shortly to exploit the season this year.

? Recent rainfall in Australia is helpful, however continued rain into the late April, May and June planting season is needed to replenish soil moisture and create weeds that need spraying.

? The business has recently reformed the South American business and we’d expect this has performed strongly. North America suffered a drought last year so any early signs of a recovery will also be of focus to the market.

? We believe that the business can replace the lost Monsanto volumes (MON_not covered). We estimate that the Monsanto glyphosate business was only contributing very marginally to Nufarm (based on Gross margins of 15% on $100m worth of sales – less any royalty payable to Monsanto). Nufarm make their living from generic products and we are prepared to back them to replace the lost volumes.

? Nufarm has tangible growth options from movement into seeds, insecticides, fungicides, ornamental and new crop types. Further, as major patents expire over time, this creates opportunities for generic providers such as Nufarm to move into new markets. The drive towards scientific farming techniques and soft commodity prices remaining firm, are all supportive long term trends.
OML retains its Buy recommendation. Target price $5.62.