A challenging outlook for soft commodities and the threat of El Nino has done little to dampen Nufarm Limited's (ASX: NUF) bullish view of the future.
The crop protection chemical company is forecasting another year of "solid profit performance" after unveiling a 35.5% increase in underlying net profit to $117.1 million as revenue inched up 4.4% to $2.7 billion for the year ended July 31, 2015.
The stock is the best performer on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) as it rallied 8.1% this morning to $7.64 on the back of the news. There just aren't many companies that can grow both top- and bottom lines.
What's more, Nufarms' underlying net profit is around 4% above consensus expectations and the company managed to expand gross profit margin by an impressive 130 basis points (1.3 percentage points) to 28% as it pushed higher margin products to customers and cut costs by around $15 million on an earnings before interest and tax (EBIT) level.
Nufarm's EBIT growth is bolstered by the strong performance from its key markets of North America, Europe and Australian and New Zealand as the lower Australian dollar and the restructuring to drive greater efficiencies provided a tailwind.
However, Nufarm had to take a $73.8 million hit to net profit due to costs related to its restructure and asset rationalisation exercise, which means its statutory net profit increased by a more modest 14.6% to $43.2 million.
The risk of drought conditions brought on by the El Nino weather phenomenon isn't all bad news for Nufarm. While this will bring drier than normal conditions to eastern Australia, it also means more reliable rainfall patterns for Western Australia and more rain for South America.
I expressed reservations in August about Nufarm's ability to sustain double-digit profit growth over the next few years and its latest result has given me more confidence that it can meet the 20% consensus profit growth estimates for the current financial year, which puts the stock on a 2015-16 price-earnings of around 16.5x.
If soft commodity prices and the weather improve, there could be further upside to earnings in 2016-17.
Interestingly, the news has little impact on fertilizer and chemical supplier Incitec Pivot Ltd (ASX: IPL) with the stock trading 1 cent lower at $3.82. Incitec, which was divested from Orica Ltd (ASX: ORI), supplies chemicals to Nufarm.
I think it's a matter of time before Nufarm breaks above June's five-year high of $8.05, but there might not be very much more upside left from that level.
