Profit down, but rebounding Nufarm is seeking acquisitions

25 Sep, 2016 04:00 AM
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Nufarm's Australian and New Zealand sales were down five per cent after a dry cropping year, but a company-wide restructure program has delivered better than expected profits and its strongest share price in six years.
Nufarm's Australian and New Zealand sales were down five per cent after a dry cropping year, but a company-wide restructure program has delivered better than expected profits and its strongest share price in six years.

Australia’s own global farm chemical manufacturer Nufarm has repaired its balance sheet and is now hunting for acquisition opportunities in the wash-up from mergers by US and European crop protection giants.

Nufarm’s net profit after tax for 2015-16 was actually down 36 per cent to $28 million, yet stronger than market expectations following one–off restructuring costs of $81.4 million.

Excluding the restructuring costs, underlying net profit after tax was $108.9m, which was also ahead of expectations of $100m.

Nufarm confirmed a final dividend of seven cents – up from six cents last year – and it share price climbed to highs of $9.10 late this week, or its best point since March 2010.

Chemical product sales for 2015-16 grew 11pc in the US and 5pc in both Latin America and Europe (to $654m, $741m and $550m), but strong competition and dry weather in Indonesia eroded a 36pc rise in Chinese, Korean and Japanese sales to prune total Asian revenue 4.3pc to $149m.

Australian and New Zealand sales were down 5pc to $47m, largely because of the late sowing break in eastern Australia.

Seed sales also fell 10pc back to 2013-14 levels ($144m) because of sliding global demand and a sorghum seed oversupply in the US

However, after delivering a better than expected profit, Nufarm managing director, Greg Hunt, is eyeing potential northern hemisphere acquisitions, anticipating global regulators would force his major rivals to divest assets.

Last week German pharmaceutical and chemical maker, Bayer, confirmed an $88 billion takeover of and US seed and chemical business, Monsanto, which is likely to see some assets of both companies sold off to avoid antitrust hurdles blocking the deal.

Dow Chemical Company and Dupont will also spin off their respective agricultural businesses as a new company, but may also streamline the manufacturing base in the process as their $77b merger goes ahead in the next 18 months.

"I think regulators will look at portfolio concentration and market share by geography," Mr Hunt said.

"There will be opportunities for us to look at potential acquisitions that come as a divestment of those."

While it was too early to determine what the regulators may do but Mr Hunt expected Bayer and Monsanto would be under pressure to divest certain molecules or product portfolios, particularly in Europe and North America where they had significant operations and large market share.

"Australia will be less impacted because we don't have genetically modified crops here," Mr Hunt said.

The Bayer-Monsanto merger will create the largest supplier of seeds and pesticides and combined Monsanto's strength in seed genetics - where it has developed corn, soybeans, cotton and other crops capable of withstanding weed killing sprays - with Bayer's strength in chemicals and pesticides.

But the deal requires approval from about 30 regulators.

Mr Hunt said Nufarm's current operations would provide good growth opportunities as it moved to increase capacity at its manufacturing sites and looked to benefit from record crop production across Australia.

Revenue edged up 2pc to $2.79b last financial year as Nufarm progresses through a major performance improvement and product rationalisation schedule due to create a $116m net benefit to its bottom line by 2018.

Savings targeted include up to 26m in manufacturing efficiencies with its Laverton site in Melbourne and Bradford plant in the UK now hitting new goals and programs 75pc implemented across the company.

Up to $65m in savings are also earmarked for the company’s procurement processes, mostly in Europe and Latin America, while product rationalisation programs – also half completed – are tipped to achieve $5m-$10m in savings.

However foreign exchange losses blew out to $41.5m, mainly because of a 66pc rise in costs associated with invoicing customers in Brazilian currency rather than US dollars.

Increasing hedging costs, interest costs and general exposure to the volatile Brazilian real cost the company up to $1.5m a month, while foreign exchange losses were also incurred because of the Australian dollar’s recovery against the US in the past six months.

RBC Capital Markets analyst, Andrew Scott, said underlying earnings were 9pc above his forecast, and 12pc above Bloomberg's consensus estimate for $256 million.

"The strong result was primarily driven by margin expansion in North America and Latin America and the $60m contribution from the performance improvement program," he said.

Nufarm delivered “a reasonably solid result in a challenging market”, said market commentary firm Motley Fool.

The Australian business was “a slight concern”, but management was confident it will strengthen in the year ahead.

“Furthermore, the outlook for the summer cropping season in Australia is positive following favourable weather conditions,” it said.

Restructuring initiatives meant a lower and more flexible cost base, which together with a better mix of high margin and commodity products was likely to see Nufarm’s sales and production volumes lift.

This was despite soft grain prices and subdued cropping market conditions.

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