Nufarm Looks To Have Weathered The Big Drought

Sun Herald

Sunday February 24, 2008

Penny Pryor

Climate will always have an impact on an agriculture supplier but, with its global spread and our recent rains, this one is well placed, writes Penny Pryor.

THE drought may have severely dented agriculture production across Australia but one supplier to the sector that has managed to insulate itself from the vagaries of local weather patterns through global diversification is chemical and pesticide provider Nufarm.

With the drought breaking across much of the north and east of the country, things are also looking up for this little company, which was the subject of much acquisition talk late last year.

Ben Griffiths of Eley Griffiths Group, which is a holder in the company, says conditions following the recent rains are ideal for large plantations of crops such as wheat, which need seed fertilisers at planting.

"All Nufarm investors watch for good rains between Anzac Day and the Queen's Birthday weekend," Griffiths says.

The majority of Nufarm revenue - 40 per cent - is still generated in Australia, followed by the Americas (35 per cent) and Europe (25 per cent).

Its most recent acquisition, Agripec in Brazil last May, may have initially seemed ill-timed but is currently looking like a good long-term investment as the boom in soft commodities takes off around the globe.

Nufarm reported an after-tax loss of $22.6 million in Brazil, due to a one-off liability left over from a hedging position taken out by previous management. But, on the upside, an improvement in Australian business conditions means the company is on track to reach the upper end of its $18 million to $23 million net operating profit forecast for the six months to the end of January.

It reported a tax-paid operating profit of $120 million for the year ending July 2007 and is targeting an estimated operating profit of $145 million for the next financial year.

Nufarm is a popular little company. Incitec took a look at it last year and China National Chemical Corporation also made an approach which valued the company at $3.3 billion, or $17.25 plus dividend a share. Other companies weighed in but talks eventually fell through when the due diligence period expired.

Nufarm has been trading at under $16 for most of 2008 but is up by almost 40 per cent over the 12 months to February.

JPMorgan says it is currently trading at close to fair value and would see attractive value at the $14 a share level.

Companies dependent on agriculture are, by their very nature, extremely volatile due to their reliance on an uncontrollable input - namely the weather. But managing director and major shareholder Doug Rathbone, having been with the company since 1973, understands the unpredictability of the industry and has the wherewithal to ensure his company is a nice little earner.

ADVANTAGES

? Soft commodity boom

? Solid yield

? Defensive

? Good management

DISADVANTAGES

? Weather

? Volatility

? Brazil loss

? Rising input costs

VERDICT

The company looks set to outperform over the next six to 12 months and is a good long-term prospect.

© 2008 Sun Herald

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