Will the share price of embattled Nufarm Limited (ASX:NUF) bounce following its capital raise?

Shares in Nufarm Limited (ASX: NUF) have gone into a trading halt as it prepares for a capital raise ahead of its full-year result announcement tomorrow.

The crop protection and seed company is finalising the institutional component of an accelerated entitlement offer that the Australian Financial Review believes will fetch $300 million in fresh capital for the embattled stock.

The share price of Nufarm has lost a quarter of its value over the past three months on the back of a profit warning due to the east coast drought when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is flat over the same period.

Nufarm isn’t the only agriculture-related stock that is under pressure. Costa Group Holdings Ltd (ASX: CGC) and Elders Ltd (ASX: ELD) are down by more than 20% over the same period although Graincorp Ltd (ASX: GNC) is faring better with a modest 2% plus drop.

The entitlement offer is to help buffer Nufarm’s balance sheet after it warned two months ago that its FY18 earnings before interest and tax (EBIT) for its Australia and New Zealand business would crash to between $5 million and $10 million, compared to the previous year’s $51.6 million.

It’s hard to say when the drought will break, so while it’s not ideal to be raising capital on a weak share price that’s hovering around a two-and-a-half year low, the decision to push the button on a new share sale is justified, if not necessary given the amount of debt on its balance sheet due to recent European acquisitions.

The question is whether shareholders should participate and I think they should (I plan to) as a lot of bad news is already in the share price with the stock trading on a consensus FY19 price-earnings (P/E) multiple of 13.3 times (assuming no further profit downgrades).

That’s the lowest it has been in at least five years and a 15% discount to its peer Incitec Pivot Ltd (ASX: IPL).

There could also be earnings upside from its European operations and sale of its new omega-3 enriched canola seeds.

If no other new skeletons fall out of Nufarm’s closet when it reports tomorrow, the stock might actually stage a rebound – in part due to a short-squeeze. Nufarm is one of the most shorted large caps on our market with the latest ASIC data showing 8.5% of its shares short-sold. That’s more than a 200 basis-point increase since the profit warning.

Short-sellers have probably targeted the stock in anticipation of the capital raise and may close their bearish position on the cap raise news (and if no other negative surprises pop out from the results). That will drive the share price higher.

Short-sellers are those who borrow shares to sell on-market in the hope of buying it back at a lower price later to profit from the difference.

The ongoing drought is unlikely to weigh much more on the stock as the market is well aware of the issue. I believe the market is also expecting a weak first half outlook.

The question is whether the second half is looking better. I suspect management will try to paint an upbeat picture for 2HFY19 in order to support the capital raise.

Let’s hope we can take that on face value.

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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia has recommended Elders Limited. 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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