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Nufarm’s results – good, bad & ugly

Herbicide, insecticide and fungicide manufacturer Nufarm (ASX: NUF), which entered a trading halt on Wednesday morning, released its half yearly results after the market closed. The shares will resume trading on Thursday morning and will likely come under selling pressure due to management downgrading the full year earnings outlook.

The good

South America was the stand-out performer. Revenues and earnings from the division exceeded those from Australia highlighting the remarkable growth Nufarm has achieved in the region and helping Group revenue increase 8% to $934 million. Likewise the Seed Technologies division, Nufarm’s newest business, had impressive revenue growth.

The bad

Nufarm’s underlying net profit after tax fell 55.7% to $10.6 million, net debt increased, the Australian division is expected to remain a drag on performance and overall Group earnings are expected to be lower than last year.

The ugly

There are a lot of moving parts to Nufarm’s results that require analysis, including the negative foreign exchange impact. Management highlighted the exchange rate as the major drag on earnings, which is reasonable, however given the global diversity of Nufarm’s business it will always be affected by exchange rates, so really it’s really just part and parcel of its on-going business. Of more importance to investors trying to understand the accounts is the current low tax expense Nufarm pays. This is partly due to some of its business being conducted in lower taxing countries but mainly due to tax credits. Once the tax rate is normalised NPAT shrinks further.

While exchange rate fluctuation will continue to cause headaches for Nufarm, its global span provides protection and diversification from singular exposure to Australia’s seasonal conditions. Elders (ASX: ELD)Ruralco  (ASX: RHL) and Incitec Pivot  (ASX: IPL) do not have this same luxury with their agricultural businesses reliant on the health of the Australian agricultural sector.

Foolish takeaway

Nufarm is in many respects an appealing business. From an investment standpoint the knocked down share price has appeal also, however the business is complicated, carries significant debt and while management says the loss of the Roundup license will not affect earnings, investors may be better off watching this one from the side-lines.

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