Nufarm (ASX: NUF) is an undervalued agricultural crop protection company that has strong global exposure with 97% of earnings originating from outside Australia. We invested in NUF as we believed the market was incorrectly assuming that poor drought conditions in Australia and Europe would continue indefinitely. Furthermore, the share price did not include any value for NUF's exciting investment into Omega3, with regulatory approvals imminent over the course of this year.
On Wednesday, NUF delivered its FY2019 half-year result, with earnings before interest, tax, depreciation and amortisation (EBITDA) of $121 million. While the result was in line with the market’s expectations, a poor outlook statement largely related to extended drought conditions and supply disruptions, contributed to lower-than-expected full year EBITDA guidance and elevated levels of working capital.
We believe that NUF's assets are undervalued by the market and see a significant earnings upside, should a return to normal weather conditions occur. We continue to hold NUF as a research-driven investment within WAM Capital and WAM Leaders.
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Wilson Asset Management takes advantage of short-term mispricing opportunities in the Australian equity market, providing investors with diversified exposure to a portfolio of undervalued growth companies.
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Have followed NUF for a long time (particularly post Sumitomo's $14/share purchase of 20% back in 2010) but could never see the value in the business. There are a number of issues I have with NUF, but 2 of the key concerns I have are: 1. poor management (or no control?) of Working Capital. From FY11 to FY18 Cash Earnings (ie NPAT adding back D&A) has been inflated by a cumulative ~$500m when compared to Reported Operating Cash Flows (post int & tax). This negative cash flow difference is largely due to adjustments for Working Capital. 2. very weak Free Cash Flow (FCF) generation. For the 8 years from FY11 to FY18, CUMULATIVE FCFs have been only ~$100m ie on average $12m per annum. Aside from the working capital impost discussed above, NUF capitalises significant levels of not just PPE costs but also Development costs. In summary, NUF is valued at $1.8bn, yet has only delivered average FCFs of $12m per annum for the last 8 years. To me it appears as though NUF is being valued like a tech stock not a highly seasonal and clearly weak cash generating industrial company. If possible, would love to hear more detail regarding the misunderstood value hidden within NUF, given such a weak historical track record.