On Friday, JPMorgan adjusted its stance on Nufarm (OTC:NFRMY) Ltd. (ASX:NUF) (OTC: NFRMY), shifting the agricultural chemical company's stock rating from Overweight to Neutral.
The firm also set a new price target of AUD 5.50, a decrease from the previous target of AUD 6.00. The downgrade follows Nufarm's first-half financial results for 2024, which fell short of expectations due to lower pricing in the Crop Protection sector.
Nufarm's earnings before interest, taxes, depreciation, and amortization (EBITDA) were approximately 14% below JPMorgan's estimates. This shortfall was attributed to the Crop Protection segment's depressed pricing, which continued to be affected by destocking activities among growers and distributors. Despite an increase in volume, this pricing issue significantly impacted the company's gross and operating margins.
The company's financial leverage also came under scrutiny, with its gearing ratio rising to 3.6 times net debt to EBITDA, up from 2.4 times in the previous corresponding period.
However, Nufarm's management anticipates an operational improvement in the second half of 2024, with EBITDA guidance set between AUD 350 million and AUD 390 million.
If these expectations are met, along with better working capital management, the gearing ratio is expected to align with the upper end of the company's target range of 1.5 to 2.0 times by June 2024.
Management emphasized the "covenant-light" nature of Nufarm's current lending agreements during the announcement, which may offer some flexibility in meeting financial obligations.
Additionally, attention was drawn to the company's fiscal year 2026 targets, which hinge on a significant recovery in prices—estimated by management to be around 20% from current levels.
While the report acknowledged challenges in the Crop Protection market, it also recognized the potential for growth in the Seeds division. JPMorgan noted that revenue and earnings from Seeds are expected to increase as the company continues to commercialize its products and normalize trading patterns.
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