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Nufarm Limited just warned of tough trading conditions

Credit: Andrew Stawarz

Shares in agricultural chemical company Nufarm Limited (ASX: NUF) have fallen by as much as 3.5% to $8.47 before recovering in morning trade following a disappointing trading update at the company’s annual general meeting.

Lower first half

Management expects first half earnings before interest and tax (EBIT) to be between $70 million to 80 million, which is lower than the prior corresponding period’s EBIT of $85 million.

The company attributed the underperformance to weaker trading results, primarily from Latin America and scheduled plant shutdowns in Australia for productivity enhancements.

However, management did forecast that underlying EBIT would grow over the whole year (excluding the European acquisitions) via a combination of rising revenues and cost savings. Nufarm expects to save $15 million in FY18 from its initiatives in procurement, supply chain and logistics, and general overheads.

European acquisitions

The company recently announced two acquisitions that have yet to obtain regulatory clearance from the European Commission.

Nufarm purchased a portfolio containing more than 50 crop protection formulations from Adama and Syngenta for $627 million.

In FY19, the protection formulations are expected to generate $250 million in sales and earnings before interest, tax, depreciation, and amortisation (EBITDA) of between $95 million to $100 million. Nufarm also purchased a portfolio of European cereals herbicides from FMC for $110 million which is expected to generate $30 million in sales and $15 million in EBITDA in FY19.

Foolish takeaway

The European transactions are expected to be finalised by the end of the first quarter in 2018 when the company will update the market with revised guidance to factor in their contributions for FY18.

2017 was another solid year for Nufarm as the underlying business continues to grow despite battling tough competitive conditions that have put pressure on farm inputs globally. Yesterday’s announcement was disappointing but the bounce off the session’s lows to $8.66 is encouraging for bulls. The European acquisitions are a good strategic fit and successful integration should see a material benefit to the company’s bottom line in the future.

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