Is the Nufarm share price in the buy zone?

The Nufarm Limited (ASX: NUF) share price has had a tumultuous start to 2019. Is it a buy?

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Canola plant and canola oil

The Nufarm Limited (ASX: NUF) share price has had a tumultuous start to 2019. After a slight rally, the company’s share price was slashed more than 20% following the release of its half-year results.

However, the relentless selling may be overdone, presenting a decent buying opportunity.

Disappointing results

Seed and crop protection company Nufarm reported its half-year results for the period ending January 2019 last week and the market was not impressed. Nearly $500 million was slashed from the value of the company as Nufarm’s share price plummeted almost 23%.

Highlights of the report included an 8% increase in revenue to $1.58 billion, however the company recorded a $13.6 million loss for the first half. Underlying EBITDA was down 2% to $121 million and the interim dividend suspended. Net debt rose from $981 million to $1.58 billion, raising concerns that Nufarm would require a round of capital raising.

The effects of drought

The lack of winter rain was cited by Nufarm in mid-2018, as the company downgraded its earnings guidance twice. The extremely dry conditions affected crop and livestock production, reducing the demand for crop protection and causing an oversupply and reduction in profit margins. As a result, Nufarm announced that production at two formulation plants in Melbourne would be cut back.

Omega 3 Potential

To combat the cyclical nature of crop production and protection, Nufarm is investing heavily in R&D. In partnership with the CSIRO, Nufarm’s subsidiary Nuseed is developing and commercialising omega-3 derived from canola. The omega-3 produced from canola has been shown to achieve the same levels of docosahexaenoic acid (DHA) as regular fish oil.

Omega-3 and DHA are important components of many products popular in China, in particular milk and infant formula. The rationale is that as pressure on global fish stocks increases, demand for alternative sources for omega-3 and DHA will increase.

Foolish takeaway

In my opinion, the sell-off in the Nufarm share price could be interpreted as an overreaction. The company has a quality portfolio of agricultural products and if the share price continues to drop, Nufarm could become a takeover target. The potential in omega-3 is also very intriguing, however, I would wait until FDA accreditation is received. Goldman Sachs sees great potential in Nufarm and has issued a buy rating on the company with a price target of $6.00.

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Motley Fool contributor Nikhil Gangaram 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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