Company Profile

Nutrien Ltd. (TSX: NTR) is a leading agriculture chemical company with an outstanding market capitalization of CAD 25.8 billion, which ranks it among the large-caps listed and traded on the Toronto Stock Exchange. The company is engaged in the production and distribution of potash, nitrogen, and phosphate products for agriculture and industrial customers worldwide. Nutrien’s operational geographies include the United States, Canada, South Africa, Australia and South America. It has six potash mines in Saskatchewan and has a mine in New Brunswick in care-and-maintenance mode.

Investment Rationale   

• A dividend Play: The company has a track record of consistent dividend payment, and despite challenging operating conditions led by the outbreak of COVID-19 pandemic, the board of directors have declared a quarterly dividend of USD 0.45/share for the quarter ending on June 30,2020. This reflects the strong financial health of the company amid times when a vast majority of companies are restricting dividend payment to maintain adequate liquidity. At the last traded price of CAD 45.1 (June 29, 2020, after the market close), the company is offering a dividend yield of 5.64%, which is significantly higher given the lower interest rate environment. Further, the company’s dividend yield is approximately 10.4 times of the Canada 10 Year Benchmark Bond Yield is at 0.54 and 1.46 times of the TSX 300 Composite Index’s dividend yield of 3.86%.

• The company is bullish on 1H20 performance despite global economic uncertainty: In the latest update reported on May 11, 2020, the company mentioned that it expects a strong quarterly performance in the second quarter of FY20 ending on June 30, 2020. Also, the company is expecting a strong spring demand for all crop inputs and services in the second quarter, as North American farmers catch up after the extreme wet weather that impacted agricultural activities last year. 

• Strong Balance Sheet: The company remains in an excellent financial position with a strong balance sheet and free cash flow, a stable dividend and ample liquidity. At the end of Q1FY20, the long-term debt to total capital ratio stood at 25.3%, lower than the industry average of 31.9%. The interest coverage ratio stood at 4.20x, reflects the financial strength of the company to easily services its debt liabilities. At the end of 1QFY20, the company’s long-term debt reduced on account of the repayment of USD 500 million notes that matured in Q1FY20. However, short-term debt increased as the company borrowed under credit facilities and issued commercial paper to raise cash for short-term seasonal working capital needs and to ensure sufficient liquidity amid challenging economic condition emerged because of COVID-19 pandemic.

• Risk Associated to Investment: The company is exposed to the risk of weakness in the global economy due to widespread distortions caused by novel virus COVID-19, which can have an impact on the global industrial nitrogen demand in 2020. Also, the company is exposed to commodities price volatility risks such as volatility in the prices of potash, nitrogen, and phosphate. This could also have an impact on the group’s financials. 

Guidance

For FY20, the company expects its adjusted earnings per share to be in the range of USD 1.5 to USD 2.1 per share, and adjusted EBIDTA in between USD 3.5 billion to USD 3.9 billion.

Source: Company Reports

Financial Highlights: Q1FY20

During the first quarter of FY20, NTR reported sales of USD 4,186 million, ~13% higher than USD 3,719 million reported in the corresponding quarter of the previous financial year. This was primarily driven by higher demand from retail and nitrogen segments, while lower sales from potash and phosphate segment remained a drag. The quarter was marked by a strong performance from the US and Australia geography. Gross margin for the Q1FY20 was lower at USD 873 million compared to USD 975 million reported in Q1FY19, due to a surge in the cost of goods sold and higher freight, transportation, and distribution costs. Earnings before finance costs and income tax stood at USD 82 million, significantly lower than USD 176 million, due to an increase in selling expenses, general & administrative expenses. The Company reported a net loss of USD 35 million, as compared to a profit of USD 41 million. Free cash flow declines to USD 181 million, as compared to USD 382 million reported in the same quarter of the previous financial year. 

Quarterly Result Highlights, Source: Company Reports

Segment Performance

Retail: Sales increased by 30% on a YoY basis to USD 2,649 million and EBITDA turned positive at USD 7 million on account of stronger sales and improving margins. Crop Protection Products and Crop Nutrients sales rose 36% and 14% to USD 1,010 million and USD 785 million, respectively. While Seeds, Merchandise and other sales also soared during the quarter. EBITDA increased in the first quarter of 2020 compared to the same period in 2019 due to strong business performance in the US and Australia including organic and acquisition related growth, along with, solid contributions from the proprietary products lines.

Potash:  Sales declined 26% during the quarter to USD 517 million on account of lower net realized selling prices and a reduction in offshore sales volumes and partially offset by increased sales volume in North America. EBITDA also slumped to USD 285 million as compared to USD 461 million reported in the Q1FY20.

Nitrogen: Revenue declined marginally to USD 530 million from USD 546 million reported in the same period of the previous financial year, led by lower net realized selling prices; however, volume stood higher as compared to the first quarter of FY19 mainly because of stronger start to the US spring application season. EBITDA fell 14% to USD 236 million because of lower net realized prices and lower earnings from equity-accounted investees which more than offset higher sales volumes and lower costs per tonne.

Phosphate: Revenue slumped by 13% to USD 279 million, due to 17% decline in Fertilizers sales. Net realized price declined in the first quarter driven by lower dry phosphate fertilizers prices. However, sales volume remains higher as compared to the first quarter of FY19, due to strong start to the spring application season in the US, following adverse weather in both the spring and fall application seasons of 2019. Cost of goods sold declined in the first quarter as compared to Q1FY19, due to lower sulfur and phosphate rock costs.

Stock Performance

At the closing (June 26, 2020), shares of NTR traded approximately 1.83% lower at CAD 45.10. In a year over period, NTR’s shares have tested a 52W high of CAD 72.84 as on 01-Aug-2019 and a 52W Low of CAD 34.80 as on 18-March-2020 and at the last traded price of CAD 45.10, its shares traded approximately 38.08% below its 52W high price level and approximately 29.6% above its 52W Low price level. The share price corrected ~ 36.3% in the last one year and declined 27.5% so far this year.

1-Year Price Performance (as on June 26^th, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 23.06% of the total shareholding. First Eagle Investment Management, L.L.C. and The Vanguard Group, Inc. hold the maximum interests in the company at 3.99% and 3.10%, respectively. The institutional ownership in the NTR stood at 68.01%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Cash Flow valuation Metrics

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The group’s performance was relatively moderate in the first quarter of FY20, supported by higher demand from retail and nitrogen segments. However, earnings remain relatively weaker in the Q1FY20, but the company is expecting a strong spring demand for all crop inputs and services in the Q2FY20. The group expects solid crop input demand in its core operating geographies, all of which have declared agriculture an essential service amid COVID-19 pandemic. Brazilian soybean and corn prices are at near historical highs, which would support higher soybean acreage in 2020 planting season. In Australia, soil moisture levels have improved significantly after several years of drought conditions which are supporting the outlook for crop input demand in 2020. Further, the company expects Nitrogen demand to remain strong through the planting season of 2020.

Also, the company has a decent financial position with a strong balance sheet and free cash flow, a stable dividend and ample liquidity. The long-term debt to total capital ratio is lower than the industry average and interest coverage ratio stood at 4.20x, reflects the financial strength of the company to easily services its debt liabilities.

The company has a decent track record of dividend payment, which is a key positive for income investors. At the last traded price, shares of NTR offering a lucrative dividend yield of 5.64%, which is significantly higher given the lower interest rate environment.

Therefore, based on the above rationale and valuation done, using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 45.10 (June 26, 2020, after the market close), with lower double-digit upside potential, based on the FY20E NTM Peer's average Price-to-Cash Flow multiple of 6.74x on FY20E Cash Flow Per Share. We have considered CF Industries Holdings Inc, Mosaic Co and Corteva Inc etc., as a peer group for comparison purpose.