We revise some assumptions critical to our fair value for agricultural innovator Nufarm (ASX: NUF). Key among these is the likely lower growth trajectory for omega-3 canola within the seed technologies segment. We also temper margin expectations for the crop protection segment.

Why it matters: Omega-3 and crop protection margin reassessments removed a combined $3.70, or near 50%, from our fair value. While early days, omega-3 has underdelivered, amid low fish oil prices, and Nufarm is recalibrating expansion plans under a strategic review.

  • We now value seed technologies, including omega-3, at $820 million, equivalent to $1.55 per share or around 40% of fair value. This is down 50% from our prior $1.6 billion assessment. While softer fish oil prices are cyclical, Nufarm will still likely slow expansion.
  • Further, as a result of a drop in assumed midcycle crop protection EBITDA margin to 13.2% from 16.0%, we now value this segment at a combined $1.3 billion or $2.45 per share for 60% of fair value. This is down 35% from $2.0 billion prior, with costs proving stubbornly resistant.

The bottom line: We reduce our fair value estimate for no-moat Nufarm by nearly 50% to AUD 4. We credit five-year group EBITDA CAGR of 16% to AUD 605 million by fiscal 2029. Our 12.3% group midcycle EBITDA margin assumption is down from 15.5%, but much improved versus fiscal 2024’s 8.7%.

  • Margin expansion anticipates stronger revenue growth from the higher-margin seed technologies segment, in addition to cost-outs. With shares hovering around $2.25, the market seemingly extrapolates far softer earnings growth than we do, and even the potential for an equity raise.
  • While net debt is elevated at $850 million-$925 million and net debt/EBITDA around 3.0, with slower growth and cost-saving initiatives in place, we expect leverage to fall to less than 2.0 by fiscal 2026. Nufarm targets $50 million in annualized run-rate overhead savings by the end of fiscal 2025.

Business strategy and outlook

Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrializing markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions.

Continued growth in food demand in industrializing nations should underwrite long-term earnings growth. Nufarm’s primary competitive strengths are marketing scale, dominant position in the Australian market, formulation expertise, and skills in marketing post-patent crop-protection products. Global expansion, including in North America and Europe, reduced dependency on the domestic market. The company’s dominance in Australia became less certain, with glyphosate pricing coming under considerable pressure. Due to the competitive nature of its markets, lack of pricing power and exposure to cyclical agricultural demand, we do not think Nufarm possesses an economic moat. Returns on invested capital have historically failed to meet the cost of capital.

In addition to its crop-protection business, Nufarm has a seed technologies business. With this, it aims to broaden its portfolio of products, all of which are targeted to improve agricultural yields. Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16% and then selling out completely in 2022.

Bulls say

  • Nufarm benefits from potential strength in soft commodities markets.
  • Nufarm has well-established distribution platforms in most major global agricultural markets.
  • Product and geographic diversification helps reduce earnings volatility.

Bears say

  • Earnings volatility is high, given exposure to cyclical agricultural markets.
  • Pricing power is limited in some product categories, and competition is high.
  • Cash flow generation has been erratic, given earnings volatility, and debt is too high.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.