A broker downgrade couldn’t stop the Nufarm Limited (ASX: NUF) share price from staging a recovery after last week’s shock profit warning.
The NUF share price bounced 1% to $5.54 in the last hour of trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 0.3%.
The stock is way down from its dismay update that sent the crop protection and seed company crashing 10% on Friday, but at least it seems to have found a floor even after Macquarie Group Ltd (ASX: MQG) cut its recommendation to “neutral”.
Bad news in the price Management warned that first-half earnings before profit, tax, depreciation and amortisation (EBITDA) would fall to between $55 million and $65 million. This is worse than the $77 million that the broker is forecasting.
What’s more, the second half may not be much better. Nufarm still has to contend with limited earnings visibility, ongoing competitive pressure and challenged raw materials supply.
“Europe in particular seems weaker than our expectations. Sales in Europe have increased but margins have been impacted by higher raw material costs and strong competition,” said Macquarie.
“North America impacted by industry-wide weak demand for crop protection products as previously announced. The $20m earnings impact in Q1 was unable to be mitigated in Q2.”
Small pieces of good news But there is more than one strand of silver lining to this sad story. The broker’s target price may have been lowered to $5.77, but that’s still comfortably ahead of where the stock had fallen.
Also, early rains across Victoria and New South Wales give hope that farming conditions in Australia are improving. There isn’t enough rainfall to declare a break in the drought, but the wet weather is still a very welcomed change.
Further, experts believe that the profit downgrade won’t affect the sale of Nufarm’s South America business to Sumitomo. The parties are awaiting regulatory approval and Macquarie thinks it will go through given the limited overlap of Nufarm and Sumitomo’s operations in Brazil.
Morgans cuts earnings but lifts valuation Meanwhile, Morgans made big cuts to its earnings forecast for Nufarm following management’s update but its target price increased.
“Despite large downgrades to our forecasts, our blended valuation has risen to A$5.05 per share vs. A$4.90 previously due to lower net debt and stronger cashflow forecasts following the sale of the working capital intensive South American business,” said the broker.
Morgans reiterated its “hold” recommendation on the stock.
The post Why Nufarm’s share price rallied even as a top broker downgraded the stock appeared first on Motley Fool Australia.
Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and Nufarm Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group 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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