Investors watch and wait as Nufarm prepares to deliver annual results

Nufarm is a global leader in plant-based omega-3, which is important for health.

Vocal investors are pushing for change at Nufarm, but are playing a patient game.

They include Allan Gray with 18 per cent, L1 Capital with 12 per cent and John Wylie’s Tanarra with 8 per cent.

The play for the trio would be to see upside in the stock from a spin-off of its crop protection unit, but the understanding is they are in no rush for now – and will no doubt watch Nufarm with interest next Thursday when it delivers annual results.

Even if they wanted it to be the case, the company is not in a position to do so after a recent downgrade to earnings.

But the more interesting situation that may be to their disliking will be if the group raises equity. Nufarm operates in a highly capital-intensive and volatile industry, given the seasonal nature of the agrochemical sector.

It is less volatile than some of its peers, but some analysts take the view its debt level is uncomfortably high. Does it need to raise capital? The company would argue not, with minimal debt covenants and no near-term refinancing requirements.

Last time it had an undesirable amount of debt was in 2019, which was addressed by the sale of its South American business to Sumitomo for $1.18bn.

A key problem is agriculture and horticulture industries spent big on crop-protection chemicals during the Covid-19 pandemic, but now spending is below long-term averages.

Also not boding well for a demerger is the Webjet situation, whereby Web Travel issued a downgrade two weeks after the group, formerly known as Webjet, spun off its business to consumer assets as a separately listed company, causing shares to crash.

The Nufarm business is largely doing all the right things, but the thinking is it just operates in a largely capital-intensive industry.

Its big hope is its seed technologies unit, which includes seed treatment products that provide protection and treatment for damage caused by insects, fungus and disease, and the Nuseed business that develops plant output traits with specific customer and consumer benefits. It distributes high-yielding sunflower, sorghum and canola seed to customers in more than 30 countries.

Nufarm is also global leader in plant-based omega-3, which is important for health and is part of the Nuseed unit. It’s still in its early stages, but it is hoped it will be a game changer in about five to 10 years’ time when regulatory approvals come through to fully capitalise on its investment in the area.

In August, when the group downgraded annual earnings before interest, tax, depreciation and amortisation guidance for the 2024 financial year by 15 per cent, Morgans said in a research note that the move was unsurprising.

There had been weak updates from peers and prices had not improved. Industry conditions are not expected to improve until early 2025.

Lower earnings puts net debt to EBITDA at 2.5 to 2.7 times, which is towards the upper end of its target range of 1.5 to 2 times, but down from 3.6 times in the first half.

Citi expects Nufarm to report $307m of underlying annual EBITDA, near the bottom end of the $300m to $330m guidance range.