Shares in agricultural chemicals supplier Nufarm sold off heavily yesterday as another earnings downgrade from the company confirmed that the big Australian drought has its hooks into the company’s profit and loss account.
Agricultural chemicals group Nufarm’s biggest shareholder, Japanese group, Sumitomo, has bailed out the Australian company by paying $1.2 billion for a key asset in a move that will allow Nufarm to slash a worrying debt burden.
Shares in crop protection group Nufarm slumped sharply yesterday after the company revealed a loss for the half-year thanks to the intensifying drought. The company also suspended its dividend while a jury decision in a court case in San Francisco sets up another possible legal blow to the key chemical in its main product.
No surprises from the Nufarm FY19 result given the company kept the market well-informed. The surprise came with the sale of the LatAm business, which had been soaking up 33% of working capital while representing 28% of earnings, suffering negative cash flow for the last five years and exposed currency risk, at what Macquarie describes as a "good price".
Credit Suisse suspects, while a capital raising and downgrade to guidance was widely expected, the support from Sumitomo was likely to have been underestimated. The company has downgraded earnings estimates for North America because of weather impacts.
Morgan Stanley believes the business is on track for earnings and working capital targets. The broker believes the current share price is capitalising current seasonal challenges, although greater confidence in the balance sheet is required for any sustained re-rating.
Credit Suisse believes the main issue in the first half result is the mismatch between market expectations and the ability or willingness of the company to effectively manage working capital fluctuations.