Nufarm buys stack up despite glitches: Citi

Nufarm has been hit by issues with the supply of key ingredients, Citi says. Picture: Yuri Kouzmin

Nufarm’s European acquisitions were still worthwhile buys despite being beset with problems, due their relatively cheap price, analysts say.

In 2018, the listed agricultural chemical company acquired the “Century” portfolio of crop protection products from ChemChina’s Adama Agricultural Solutions for $US515m and a herbicide portfolio from FMC corporation for $US90m.

Those acquisitions led to Nufarm owning 50 crop protection product brands and 260 product registrations across Europe. But regulatory uncertainty surrounding some key product ingredients and supply chain issues mean the company will be unable to reap the full benefit, Citi analysts said in a note.

European regulators are considering outlawing four active ingredients in the Century Portfolio. If this eventuates, Citi estimates the total hit to sales over the next year could reach $40m, or $12m in EBITDA for Nufarm’s crop protection business – 7 per cent of the total for the European business.

Additionally, the outlawing of a common insecticide active ingredient on outdoor field crops in France in 2018 resulted in a $11m EBIT hit.

But perhaps more central to the brand’s problems is the fact that nine out of 10 of the core products acquired from Adama contained active ingredients primarily sourced from China.

Throughout 2018, up to 4000 chemical plants were closed as a result of increased regulatory scrutiny over pesticide plants by Chinese authorities, reducing total pesticide output by 32 per cent on a monthly basis and halving total output in 2019 when compared to 2015.

Overall, nine product ingredients were affected, resulting in a $30m hit to European earnings in 2019.

The Citi analysts said they expected supply-based cost pressures to continue into 2020, with lower Chinese supply of pesticides increasing further ingredient cost, as well as COVID-19 increasing logistics costs.

Overall, the analysts said it was unlikely that Nufarm would deliver on its $110m EBITDA medium-term earnings guidance for the two portfolios and predicted a figure of $93m over FY 2020 and 2021.

At that figure, the acquisitions would have been acquired at a 8.2 times enterprise value to EBITDA ratio – 25 per cent lower than the 10.9 times industry average and largely “value-neutral.”

“Accordingly, we still view the Century and FMC Europe acquisitions as strategically- and financially sound for Nufarm, despite the experience to date and the short-term input cost and regulatory headwinds,” the analysts said.

Shortly before midday Nufarm shares were trading at $4.165, up 0.6 per cent.