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Why brokers are bullish about Nufarm Limited (ASX:NUF) despite its devastating profit downgrade

The share price of Nufarm Limited (ASX: NUF) is making a tentative recovery following its brutal sell-off yesterday as brokers remain upbeat on the seed and crop protection products supplier.

The stock is outpacing gains on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) with a 1.3% rally to $7.58 as the broader market rose 0.6% in lunchtime trade.

That is a far cry from the 11% plus flogging the stock received yesterday following a profit warning from management due to bad weather.

But just about every broker believes the sell-off is overdone and have reiterated their buy recommendation on the stock even as management warned that drought conditions would knock up to 16% off its underlying earnings before interest and tax to between $255 million and $270 million in FY18 compared to the previous year when management had originally tipped growth of 5-10%.

To put this downgrade in context, the profit warning means that Nufarm’s EBIT for Australia and New Zealand would only come in at $5 million to $10 million compared to JP Morgan’s estimate of $45 million.

But that doesn’t faze the broker. It pointed out that Nufarm is cheap given that it’s trading greater than two standard deviations below its three-year forward price-earnings (P/E) multiple average. The broker has reiterated its “overweight” recommendation on the stock even as it cut its price target by $1 to $9 a share.

Citigroup also believes the sell-off makes for a compelling buying opportunity for the stock and points to the recent acquisition of Arysta LifeScience Inc. by UPL Ltd. to highlight Nufarm’s strategic value.

“On our updated forecast, NUF remains cheap against its historical valuations (c8x EV/EBITDA) and in our view, captures little value for its Omega-3 and ANZ businesses,” said Citigroup.

“We also highlight NUF’s corporate appeal given UPL’s recent US$4.2Bn Arysta acquisition implies a strong 10.4x EBITDA multiple.”

Supporters of Nufarm are bullish on the longer-term outlook for the company from sales of its patented canola seeds that are rich in Omega-3 oil. Up to now, Omega-3 can only be sourced from fish and having a crop that is enriched with the oil is a game-changer for the industry.

Nufarm is also likely to benefit from its US expansion and from its European acquisitions even though the inhospitable weather means its FY19 earnings are likely to be impacted as well.

But those with a longer-term investment horizon will want to buy into the stock with analysts from Macquarie Group Ltd (ASX: MQG) and Credit Suisse also reaffirming their buy-equivalent call on Nufarm.

I like the stock but I think there is no rush for bargain hunters to buy Nufarm. The next catalyst for the stock is probably in late September when the company reports its full-year results and provides an update on its Omega-3 and overseas expansion.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. 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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