Agricultural innovator Nufarm NUF says it’s on track with several initiatives announced with fiscal 2024 results last November, including cost savings and inventory efficiency. The start to fiscal 2025 has also seen strong demand for crop protection products, although prices haven’t moved.

Why it matters: Nufarm’s fiscal 2026 revenue target is $4.4 billion-$4.6 billion, and we still credit the high end, amounting to a two-year compounded annual growth rate (“CAGR”) of 18%. This anticipates a recovery in crop protection from cyclically low prices in addition to new crop protection product introductions.

  • It also factors accelerated seed technology growth via omega-3 canola and bioenergy developments. Pleasing then is the strong start to fiscal 2025, at least on the demand side. Stability in the cost of goods benefits crop protection margins.
  • Annual cost savings of $50 million are expected to be realized by fiscal 2026, and by end-fiscal 2025, Nufarm aims to achieve a 17% year-on-year reduction in inventory. Inventories creditably fell 20% in fiscal 2024,after industrywide buildups following covid lockdowns.

The bottom line: Our $7.70 fair value estimate for no-moat Nufarm stands. We still credit a five-year group earnings before interest, taxes, depreciation and amortisation (“EBITDA”) CAGR of 25% to almost $860 million by fiscal 2029. Our 15.5% group midcycle EBITDA margin assumption would be much improved against fiscal 2024, which plumbed 8.7% lows.

  • Shares have risen modestly from recent $3.50 lows, but at $3.95, they remain materially undervalued. Postpandemic earnings recovery has proven sluggish, and we expect the market doesn’t credit the turnaround we anticipate.
  • New crop protection products, accelerated seed technologies growth via omega-3 canola, and bioenergy developments underpin our comparative optimism. Nufarm expects to double omega-3 revenue in fiscal 2025 to $100 million.

Big picture: The clear overarching macroeconomic revenue drivers haven’t changed, including a rising global population and quality of living increases.

Business strategy and outlook

Nufarm 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. 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 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 product. Global expansion in recent years reduced dependency on the domestic market. The company’s dominance in Australia has become 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.

Nufarm 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.

Nufarm 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.

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