While some may think buying shares of anything right now is a fool’s game, some brave-hearted intelligent investors are always on the lookout for bargains in tough times.   

One share in the 04 October column should have caught the eye of those who follow daily market news – Nufarm Limited (NUF.)  Here is a Reuter’s headline from 28 September, 2011 that makes the Nufarm upgrade worthy of note:

•    Australia’s Nufarm Full-Year Loss Doubles to $50 Million

Read beyond the headline – which some not so intelligent investors often fail to do – and you learn the loss of $49.9 million was due to one time impairment charges over a receivables dispute with agricultural giant, Monsanto and operational issues in Brazil. What’s more, the charges were expected.  Nufarm had pre-announced the coming write-off.

Read further to see their underlying profit minus the charge was $98.2 million, a stunning 68% increase over the Fiscal Year 2010.  Nufarm is an international leader in the crop protection business, selling herbicides, pesticides, and fungicides.  Their markets include Australia/New Zealand, North America, South America, Asia, and Europe.

Since no matter how bad global economies turn people still need to eat; is NUF a defensive share worth a look?  How do market participants view this company?

Market Valuation Ratios

   NUF  ASX  Materials Sector
P/E  11.55  11.61  11.61
 P/B  0.82  1.35  1.33
 P/S  0.52  1.84  27.03
 P/EG  0.35  1.01  0.5
 Dividend Yield  0  5.5  4.1

There is nothing in these numbers that screams “Buy Me!”  The P/E Ratio is in line with both the Materials Sector and the ASX.  While the P/EG Ratio at first glance appears attractive, the Sector value tells us the P/EG for NUF is not as noteworthy as it seems.  Note the Dividend Yield of 0.  The company cancelled its dividend for the year.  While some might see that as a wise move considering the one-off charges, others see it as part of the company’s continuing difficulties over the past several years.  To get a sense of their history, let’s look at some five year performance measures.

5 Year Financial Performance Measures

   07/2007  07/2008  07/2009  07/2010  07/2011
 Revenues ($m) 1764.4  2492.5  2677.1  2168.9  2083.7
 Net Profit After Tax ($m)  148.8  123.2  64.5  -34.1  -62.1
 Debt to Equity (Gross Gearing)  45.2%  73.5%  62.7%  46.2%  46.2%
 Dividend Yield  2.4%  2.1%  2.5%  0  0


The Net Profit after Tax (NPAT) listed here does not reflect the one-off charges the company made on both the Brazilian operations and Receivables due from Monsanto.  While the drop in profit between FY 2008 and FY2009 could be attributed to the GFC, you can see the company significantly underperformed in 2010.  The negative earnings surprise in that year stunned share market participants and share price dropped accordingly.  The company’s decline in revenues continued into Fiscal Year 2011.  

While these numbers are less than impressive, the share price movement for NUF over the last five years is even bleaker.  Here is a five year chart, comparing the share price movement of NUF against the performance of the ASX 200 – the XJO.

Five Year Share Price Movement

Prior to the GFC NUF was outperforming the market but its share price fell sharply as a result of the crisis.  As you can see, NUF’s share price began to recover sooner than the rest of the market but the drop in NPAT from 123 million in 2008 to 64 million in 2009 started the shares in a downward trend from which they have yet to recover.  Since the second quarter of 2010, NUF has unperformed against the XJO.

Given these facts, why would respected firms like Macquarie and RBS put a buy recommendation on shares of NUF?

These firms are not the only ones who feel NUF can achieve a course correction that can return them to their glory days.  Japanese chemical company, Sumitomo, has acquired a stake in Nufarms.  The original acquisition was for a 20% stake on 16 April 2011.  On 10 May 2011 Sumitomo increased its interests to 23%.

In addition, on 04 May 2011 National Australia Bank acquired a 5% interest in Nufarm, becoming in the words of Nufarm management, a “substantial shareholder.”

If major players like Sumitomo and NAB feel Nufarm is worthy of their investment dollars, is that not proof enough for the average retail investor that NUF has a solid future?

In a word, no.  

First, should the share price continue to fall, Nufarm’s international reach and reputation make it a takeover target.  It is not beyond the realm of possibility that Sumitomo itself would look to take controlling interest.  For retail investors with high risk tolerance, this could be worth the investment, assuming the takeover price is attractive.  However, as you probably know, this is not always the case and hostile takeovers are not always maximally profitable for shareholders in the short term.

Second, Nufarm has debt issues.  The numbers for the most recent quarter (MRQ) show $258 million cash on hand with total debt of $723 million.  Of that total debt, $600 million are in debt facilities that must be restructured by the end of the year.  

Should they fail to do so; big players like NAB and Sumitomo have enough cash to absorb the inevitable share price collapse.  Do you?

Company management has issued statements assuring investors negotiations are on track and they will have no problem getting financing.  There are two potential issues regarding these pronouncements retail investors need to consider.

The first is the current state of the global economy.  The European debt crisis will resolve itself one way or another eventually.  There is no good scenario for the banking industry.  Some will be hurt.  However, there are financial experts warning the crisis could lead to another global credit freeze, which would leave NUF out in the cold.  Again, Sumitomo and NAB can withstand that.  Can you?

Finally, there is reason to question NUF management.  While the share market has been generally willing to accept the write-downs that negatively impacted profitability as one time events, retail investors should ask themselves how management allowed these charges to happen.

The first charge-off was a reduction in Receivables owed by Monsanto.  Monsanto is a large, powerful company and one should wonder why Nufarm could not work this out.  In addition, in mid summer, NUF management announced a charge off amount leaving $25 million due.  In September they had to expand the write down to receivables due of only $13.5 million.

The second charge-off was an impairment loss with their Brazilian operation.  Here is what the accounting notes in the financial statements had to say about this loss:

•    Impairment Loss – Brazil CGU

The group has recognized an impairment loss of 70.004,000 for its Brazil CGU.  The Brazil CGU has incurred losses in recent years and has not met financial targets due to a number of product, market, and economic factors that impacted the business.

Two issues should concern you.  First, if these have been ongoing losses spanning years, why has management been so slow to react.

The second is the nature of the Brazilian economy.  They are already the world’s largest exporter of orange juice, sugar, coffee, and tobacco.  Experts tell us they will pass the United States as the world’s largest exporter of agricultural products within the next decade.

Even the most risk tolerant investors should take the time to see if they could learn how NUF can have “operational issues” in the world’s second largest agricultural producer.

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