Shareholders in leading Australian crop protection manufacturer Nufarm Limited (ASX: NUF) have enjoyed stellar gains in the past 12 months with the share price rising 62.5% to $6.64. That's a great return compared with the 8.5% gain in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Despite the recent outperformance, the longer-term performance of Nufarm hasn't been so pleasant for shareholders – the share price remains 20% below its level of five years ago and 36% below its level of ten years ago. In contrast, the index is up 20% and 43% over five and ten years respectively.
While investors are right to be concerned about the poor long-term performance of this company, the recent gains could suggest that the market is pricing in better times ahead.
Here are three reasons why now could be the right time to add Nufarm to your watch list.
- Nufarm boasts global operations providing agricultural inputs in crop protection (namely herbicides, insecticides and fungicides) and seed technology. With expectations that growing global populations and incomes will see heightened demand for protein, Nufarm stands to benefit.
- Nufarm recently announced that its long-serving Managing Director would be stepping down. Given the poor decade of performance in terms of total shareholder value at Nufarm, it is arguably timely that a fresh pair of hands took the reins.
- Nufarm recently announced it would pursue a $100 million cost reduction and continuous improvement program along with a program to aggressively reduce working capital. The company has also provided an outlook that it expects to generate growth at an underlying earnings before interest and tax level in 2015.
Buy, Hold or Sell?
As the above three points illustrate, the market dynamics for Nufarm appear favourable. Despite this, there are reasons for investors to take care.
Firstly, the balance sheet is less than pristine with a large debt load and significant defined benefit obligations which are not fully funded.
Secondly, the current pricing requires an investor to be confident that the group will achieve significantly higher earnings in the coming years. For the year ending 31 July 2014, Nufarm reported earnings before material items of $74 million which was up on the $69 million achieved in the prior year; on a diluted earnings per share basis this equated to 26.3 cents.
With the share price currently hovering around the $6.60 mark, this implies a trailing price-to-earnings ratio of 25.1x. For investors looking for exposure to the agricultural sector, not just in Australia but globally, Nufarm is an obvious contender.
It is not without its risks however and risk-averse investors may prefer to focus on growing global demand for protein-rich foods on value-added manufacturers such as Bega Cheese Ltd (ASX: BGA), Freedom Foods Group Ltd (ASX: FNP) and Bellamy's Australia Ltd (ASX: BAL).
