Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Capital Markets

We support Nufarm’s AUD 690 million acquisition of Adama and Syngenta’s Europe product portfolios (Century). However, we don’t recommend participation in the associated fully underwritten AUD 446 million entitlement offer, as the AUD 7.50 issue price is at a 17% premium to our AUD 6.50 fair value estimate. Thankfully, the offer is renounceable, meaning retail shareholders can trade their entitlements. Pleasingly, Retail rights trading begins on Oct. 27, well before the start-of-trading of Institutional allotments on Nov. 6. Bravo Nufarm--at last a company looking after retail shareholders! The Institutional portion of the offer closes on Oct. 26 and for Retail on Nov. 15. Trading of Retail entitlements on the ASX ends on Nov. 8.Century’s acquisition is subject to European Commission, or EC, regulatory approval, though we see no impediments. The transaction is expected to complete in early 2018. Major 23% Nufarm shareholder Sumitomo won’t participate in the offer due to long-standing protocols, but has separately extended a series of global collaboration agreements. Sumitomo is also believed to have been a failed competing bidder for Century in its own right. The waters are muddy but navigable.It seems strange describing the transaction as marginally fair value-accretive when our headline fair value estimate is unmoved at AUD 6.50 because gains are hidden by the AUD 0.17 per share bonus element of the entitlement offer. We estimate the capital raising side of the equation is about AUD 0.35 fair value estimate-accretive, half due to the bonus element and half simply due to the AUD 7.50 raising’s 15% premium to our AUD 6.50 fair value. We view Century as marginally overpriced which pares the net gains back to around AUD 0.17 per share, coincidentally in line with the bonus element. Nufarm is paying 6.9 times fiscal 2019 EV/EBITDA including inventory, a premium to our prior Nufarm fair value 6.3. We value post-acquisition Nufarm on a fiscal 2022 EV/EBITDA of 6.2.Century is desirable no doubt, becoming available only due to the EC mandating ChemChina divest it as part of its own acquisition of Syngenta. Nufarm expects Century’s enviable margins to drive mid- to high-single-digit EPS accretion in the first full year of ownership in fiscal 2019. We concur, with the higher margins to deliver midlevel 5% EPS accretion in real terms in our model. Century is expected to contribute net sales of approximately AUD 250 million at an EBITDA margin of AUD 95-100 million or approximately 40%. Nufarm’s fiscal 2017 European segment EBITDA margin was 22.5% or nearly half Century’s, and group EBITDA margin overall was just 12.1%. But even with Century’s assistance, we still don’t expect Nufarm to earn a moat. Admittedly improved midcycle returns of 9% and better still fall short of our 10% WACC estimate.Century’s complementary range consolidates Nufarm’s lead post-patent supplier status in Europe. It brings established brands with over 50 crop protection formulations and includes 260 product registrations sold into 29 European markets, with no physical assets apart from inventory. Transfer to Nufarm’s manufacturing facilities will occur gradually over a two- to three-year period.Nufarm had net debt of AUD 680 million at end July 2017, and fiscal 2017 net debt/EBITDA of 1.8 including minimal operating leases is manageable. With the Century acquisition, we determine peak net debt of AUD 950 million in fiscal 2018, with net debt/EBITDA just above 2.0, before falling to conservative levels of sub-1.0 by fiscal 2022. Nufarm has warned it is also in exclusive discussions with another party to acquire a further sub-USD 100 million crop protection portfolio. It is intended the purchase cost would be covered by debt. But even assuming this secondary transaction proceeds, we don’t determine any material deleterious change to debt metrics.Analyst: Mark Taylor

We support Nufarm’s AUD 690 million acquisition of Adama and Syngenta’s Europe product portfolios (Century). However, we don’t recommend participation in the associated fully underwritten AUD 446 million entitlement offer, as the AUD 7.50 issue price is at a 17% premium to our AUD 6.50 fair value estimate. Thankfully, the offer is renounceable, meaning retail shareholders can trade their entitlements. Pleasingly, Retail rights trading begins on Oct. 27, well before the start-of-trading of Institutional allotments on Nov. 6. Bravo Nufarm--at last a company looking after retail shareholders! The Institutional portion of the offer closes on Oct. 26 and for Retail on Nov. 15. Trading of Retail entitlements on the ASX ends on Nov. 8.Century’s acquisition is subject to European Commission, or EC, regulatory approval, though we see no impediments. The transaction is expected to complete in early 2018. Major 23% Nufarm shareholder Sumitomo won’t participate in the offer due to long-standing protocols, but has separately extended a series of global collaboration agreements. Sumitomo is also believed to have been a failed competing bidder for Century in its own right. The waters are muddy but navigable.It seems strange describing the transaction as marginally fair value-accretive when our headline fair value estimate is unmoved at AUD 6.50 because gains are hidden by the AUD 0.17 per share bonus element of the entitlement offer. We estimate the capital raising side of the equation is about AUD 0.35 fair value estimate-accretive, half due to the bonus element and half simply due to the AUD 7.50 raising’s 15% premium to our AUD 6.50 fair value. We view Century as marginally overpriced which pares the net gains back to around AUD 0.17 per share, coincidentally in line with the bonus element. Nufarm is paying 6.9 times fiscal 2019 EV/EBITDA including inventory, a premium to our prior Nufarm fair value 6.3. We value post-acquisition Nufarm on a fiscal 2022 EV/EBITDA of 6.2.Century is desirable no doubt, becoming available only due to the EC mandating ChemChina divest it as part of its own acquisition of Syngenta. Nufarm expects Century’s enviable margins to drive mid- to high-single-digit EPS accretion in the first full year of ownership in fiscal 2019. We concur, with the higher margins to deliver midlevel 5% EPS accretion in real terms in our model. Century is expected to contribute net sales of approximately AUD 250 million at an EBITDA margin of AUD 95-100 million or approximately 40%. Nufarm’s fiscal 2017 European segment EBITDA margin was 22.5% or nearly half Century’s, and group EBITDA margin overall was just 12.1%. But even with Century’s assistance, we still don’t expect Nufarm to earn a moat. Admittedly improved midcycle returns of 9% and better still fall short of our 10% WACC estimate.Century’s complementary range consolidates Nufarm’s lead post-patent supplier status in Europe. It brings established brands with over 50 crop protection formulations and includes 260 product registrations sold into 29 European markets, with no physical assets apart from inventory. Transfer to Nufarm’s manufacturing facilities will occur gradually over a two- to three-year period.Nufarm had net debt of AUD 680 million at end July 2017, and fiscal 2017 net debt/EBITDA of 1.8 including minimal operating leases is manageable. With the Century acquisition, we determine peak net debt of AUD 950 million in fiscal 2018, with net debt/EBITDA just above 2.0, before falling to conservative levels of sub-1.0 by fiscal 2022. Nufarm has warned it is also in exclusive discussions with another party to acquire a further sub-USD 100 million crop protection portfolio. It is intended the purchase cost would be covered by debt. But even assuming this secondary transaction proceeds, we don’t determine any material deleterious change to debt metrics.Analyst: Mark Taylor

Acquisition of Century Crop Protection Portfolio Favourable for Nufarm, No Material Change in View

Nufarm Ltd

Acquisition of Century Crop Protection Portfolio Favourable for Nufarm, No Material Change in View