This stock jumped after earnings results; still significantly undervalued
A five star stock with a projected annual growth rate of 10%.
Mentioned: Nufarm Ltd (NUF)
Nufarm (ASX: NUF) is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all 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.
No-moat Nufarm shares jumped more than 10% intraday of its fiscal 2023 result. The market was seemingly buoyed by earnings resilience in the face of El Nino and confirmation the Australian agricultural innovator remains on track to meet fiscal 2026 revenue aspirations of more than AUD 4.6 billion.
Fiscal 2023 revenue declined by 8% to $3.5 billion and underlying net profit after tax fell 8% to $122 million. However, there were positive elements, particularly from seeds and omega-3 canola, which renewed belief in the fiscal 2026 target and moved focus away from potential unfavourable weather patterns and normalisation of recent historically high agricultural commodity prices.
Nufarm has a $7.70 fair value estimate. The shares are well below our fair value (at 20 November 2023). Fiscal 2026 revenue of $4.6 billion would amount to an annual average growth rate of 10%, considerably ahead of expected market average growth of 2%, and our forecast still credits such. It captures new crop protection product introductions and accelerated seed technologies growth via Omega-3 canola and bioenergy developments.
We maintain that ongoing earnings growth from the seeds technologies segment could be a key catalyst to share price appreciation.
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.
Sumitomo Chemical's investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.
Continued growth in food demand in industrialising 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 product. Global expansion in recent years reduced dependency on the domestic market. Sumitomo Chemical made an investment in Nufarm, endorsing the quality of its global distribution. The collaboration between the two firms also broadens product portfolios and adds distribution in Asia.
Key Metrics for Nufarm (ASX: NUF)
Morningstar Rating: 5 stars
Morningstar Economic Moat Rating: None
Morningstar Uncertainty Rating: High
Morningstar Capital Allocation Rating: Standard