Top brokers say Nufarm Limited is a buy

Adverse weather conditions may have negatively affected the near-term earnings outlook for listed agricultural group, Nufarm Limited (ASX: NUF), but there are strong signs the stock may be worth looking at as a longer-term play.

On Tuesday, the company downgraded its earnings forecasts due to ongoing challenging weather conditions across Australia, Europe and the United States.

Nufarm said it expected underlying earnings before interest and tax for the twelve months to 31 July 2018 to be approximately 5% above FY2017’s underlying EBIT of $302.3 million. This compared to the company’s previous guidance of 5% to 10% growth.

However, Nufarm appears to have a solid long-term growth outlook, with its European acquisitions and its omega-3 project promising substantial upside from current levels.

The omega-3 project is being developed through the group’s subsidiary, Nuseed Pty Ltd, and should produce the world’s first plant-based source of long chain omega-3 fatty acids. This will help relieve pressure on wild fish stocks, with Nufarm claiming that one hectare of its omega-3 canola has the potential to provide the omega-3 yield from 10,000 kilograms of wild caught fish.

Morgan Stanley is one broker that sees the initiative as providing material upside for the group. The broker says there is 32% potential upside to its current price target of $11.75 and remains “Overweight” on the stock.

“In our view, NUF remains undervalued at current levels, given the improvement in the base business and robust earnings growth outlook. Beyond the base business, we think the Omega3 project presents substantial incremental upside that is yet to be captured in the share price,” it said in a report.

Morgans, meanwhile, points to Nufarm’s acquisitions in Europe as providing a robust earnings outlook for the group in FY2019 and FY2020.

“Its acquisition of two high-margin European product portfolios will strengthen its growth profile and earnings quality and we believe, should gradually narrow its valuation discount to peers,” the broker said in a report.

Nufarm announced in October 2017 that it would acquire a portfolio of crop protection products from Adama Agricultural Solutions Ltd and Syngenta Crop Protection AG and related group companies for US$490 million. The product portfolio includes over 50 crop protection formulations which are registered for use in European markets and is expected to generate revenues of approximately A$250 million; an EBITDA contribution of approximately A$95-100 million; and be mid- to high-single digit earnings per share accretive (pre-amortisation) in the first full year of ownership (FY2019), the company says.

Credit Suisse and Morgans are also positive due to Nufarm’s relatively cheap valuation at current levels. Credit Suisse has Nufarm on an FY2019 P/E of 15 times, whilst Morgans has the stock trading on an FY2019 P/E of just 13.5 times.

Morgans said that Nufarm’s valuation was undemanding, particularly compared to domestic chemical peers, with Orica Ltd (ASX: ORI) on 21.9 times, Incitec Pivot Ltd (ASX: IPL) on 16.6 times and DuluxGroup Limited (ASX: DLX) on 20.1 times, according to its estimates.

Most brokers also note some near-term positives for the group at its upcoming investor day on May 10.

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