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Why Nufarm Limited is a buy even after a share price surge

Credit: Andrew Stawarz

Don’t be put off by the near 8% rally in Nufarm Limited’s (ASX: NUF) share price over the past two days after management handed in its interim results.

I think there’s still quite a bit of upside left in the stock, which is likely to be heading towards $10 even as the herbicide and seed supplier posted am 11.8% drop in underlying earnings before interest and tax (EBIT) to $75 million.

But the market was expecting the loss that is mainly due to production interruptions and operating challenges in the Brazilian market. The first half tends to be a bit of a write-off for Nufarm anyway due to seasonal factors.

What’s really getting investors excited are expectations of a big second half turnaround with management re-iterating its full year underlying EBIT growth guidance of between 5% and 10% and growing expectations that FY19 will be great year for Nufarm as it will see the benefits from recent acquisitions that should lift its earnings per share growth to around 24%!

Further, Nufarm said it is likely to be the first in the world to launch a land-based, sustainable, long-chain omega-3 canola solution for use in feed and human consumption.

Long-chain omega-3 is essential for human and fish health, and will ease pressure on fish population as fish is currently the largest source of omega-3.

Nufarm’s omega-3 canola has been approved for use by the Australian authorities and the company believes it will get approval from the US and Canadian governments in 2019.

The stock looks cheap to me as it’s trading on a FY19 consensus price-earnings multiple of around 14 times, which will drop further as the company is expected to maintain a double-digit earnings growth profile (albeit not at the same clip).

There aren’t many stock in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) with such a growth outlook and that makes Nufarm an attractive buying opportunity in my book.

It’s exposure to offshore markets, including the US, means it is well placed to benefit from any prevailing weakness in the Australian dollar as the rest of the developed world lifts interest rates ahead of us.

I generally like agri-businesses even though it hasn’t been easy for share investors to make a good return on agriculture-related stocks. Besides Nufarm, I think Clean Seas Seafood Ltd (ASX: CSS) also looks interesting as the fish farmer appears to have turned a corner.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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