Nufarm seed earnings to double

ANALYSTS are divided on Nufarm's prospects after the crop protection and seeds group said it will double earnings in its seed business to $60 million over the next three to four years as it looks to diversify into higher margin and higher growth markets.

Fresh from global seed giant Monsanto's termination of Nufarm's distribution rights for weedkiller Roundup and a bruising profit warning, Nufarm needed a positive story to sell to the market at an investor day in Melbourne on Tuesday, The Australian Financial Review reports.

"We took the opportunity to bring our global seed management team into Melbourne to update the buy and sell side on an important part of the business that fits into strategic areas of growth," Nufarm group executive, corporate strategy and external affairs, Robert Reis said.

The Nuseed business comprises seeds, traits and seed treatment, and leverages extensive research and development (R&D) to deliver top yielding hybrids with desirable disease, stress and productivity traits. Most analysts were bullish on the opportunity.

"It's a key area of growth for the business that the market had a very poor understanding of," RBS Morgans analyst Belinda Moore said.

"I came away very positive on the seeds business [which] could be cause for a PE multiple re-rate. If you look at all the big seed companies they trade on a much bigger multiple."

Although not everyone was convinced. "While we like the growth opportunities presented, we don't believe they will be sufficient to offset the earnings impact of recent distribution losses within pesticides," Citigroup analyst Tim Mitchell said in a research note.

Brent Zacharias, general manager of the Nuseed Group, said that the seeds business spends about 7 per cent of revenue on R&D relative to 3 per cent for the broader group as the business looks to fundamentally change crop value.

Nuseed has product testing and sales in more than 35 countries, and the global seeds and traits market is estimated to be worth $80 billion. Nuseed is already a market leader in niche crops sorghum, sunflower, and canola ,but aims to be in the top quartile in each product it sells.

"It's an important reminder to the market that Nufarm has growth opportunities in a number of spaces that really takes the risk out of the business," Mr Reis said.
Greater earning certainty will be critical if the company wants to entice previously-wounded fund managers back onto the register.

In the six months ended January 31, profits plunged more than 50 per cent to $8.4 million, prompting a one-day 17 per cent drop in Nufarm shares.

Including 12 acquisitions since 2004, Nufarm has spent $200 million on its seeds business and Mr Zacharias indicated that mergers and acquisitions would be a key part of the company's strategy.

"In the last few years we've done a number of acquisitions in the seed space and we'll continue to look for acquisition growth," he said.

With Nufarm shares having dived more than 30 per cent since January, Nufarm itself looks like it could be a takeover target at these levels.

Any bid, though, would be dependent on major shareholder Sumitomo. Mr Reis said there had been no discussion as to whether Sumitomo could increase its 23 per cent stake. China's biggest chemical supplier, Sinochem, made an unsuccessful $13-a-share bid for Nufarm around four years ago.

Nufarm's seed business delivered $121 million in sales in 2012 and a gross margin of 53 per cent. The $30.5 million in earnings before interest and tax generated in 2012 represents 15 per cent of group EBIT.

Wilson HTM analyst James Ferrier said doubling EBIT in three to four years was a good target given that many of Nuseed's product development programs won't deliver earnings until well after that date. "The seed segment of the market is higher growth than crop protection chemicals and is also higher margin. We have a buy on the stock and we think it is good value at these levels."