Nutrien Ltd (TSX: NTR) produce and distribute over 25 million tonnes of potash, nitrogen and phosphate products for agricultural, industrial and feed customers worldwide. The company has leading agriculture retail network that services over 500,000 grower accounts and well-positioned to meet the needs of a growing world and create value for their stakeholders.

Revenue Mix

Investment Rationale  

• Compelling Second Quarter Performance: Nutrien delivered a solid performance in the second quarter and first half of 2020, supported by strong growth in their Retail Ag Solutions earnings and excellent operational performance across Potash and Nitrogen business units. Nutrien’s many competitive advantages were apparent this quarter, including the quality of assets and impressive free cash flow generation, even at the bottom of the commodity cycle. The group’s digital platform continues to exceed expectations and expect to reach US$1 billion in online orders by the end of2020 and are introducing new data-driven offerings to help farmers make quicker and more informed decisions for their business.

Source: Company Presentation

• Robust Agriculture and Retail Market Outlook: North American spring fertilizer application was robust, and customer engagement in summer fill programs was strong as wholesale customers replenished inventories. The US corn and soybean crop is progressing well ahead of 2019 levels, which could be supportive of strong fall applications. In Australia, moisture levels have improved particularly in eastern states which is expected to result in much higher planting year-over-year. In Western Canada, the group expects that generally good crop conditions would support summer crop protection demand. Brazilian soybean and corn prices continue to be historically high. As a result, Brazilian growers are realizing record margins and have forward contracts to sell historically high proportions of their anticipated 2021 harvest. Brazilian soybean acreage is expected to increase by approximately 5% in the upcoming planting season. Further, US crop demand fundamentals have stabilized as a result of a rebound in ethanol demand and strong Chinese purchases due to tight Chinese inventories and rising prices.

Source: Company Presentation

• 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 Q2FY20, the group’s Debt to Equity ratio stood at ~ 0.54x, substantially lower than the industry average of 0.91x. The interest coverage ratio stood at 4.20x, which reflects the financial strength of the company to cover its debt liabilities easily. The group’s debt proportion slightly increased in the second quarter due to following reason: Short-term debt increased primarily from commercial paper issuances as part of the group’s seasonal working capital management and Long-term debt (including current portion) increased due to the addition of US$1.5 billion in notes issued in May 2020 exceeding the repayment of US$500 million in notes that matured in the first quarter of 2020.

• Strong Free Cash Flow Yield: Nutrien generated US$1.6 billion in free cash flow, including improvement to non-cash operating working capital in the second quarter. Moreover, the company is offering an attractive free cash flow yield of 6.5%, which reflects the business and financial strength of the company. A higher free cash flow generation ability of the company provides a margin of safety to the existing and potential shareholders of the company.

• An income play: The Agri-chemical group has a track record of consistent dividend payment. Amid 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 54.99 (on September 18, 2020, after the market close), the stock was offering a dividend yield of 4.37%, which is significantly higher given the lower interest rate environment. Further, the company’s dividend yield is 1.21 times of the TSX 300 Composite Index’s dividend yield of 3.6%.

• 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.

 

2Q FY20 Financial Highlights

Source: Company filings

• In the second quarter and first-half, 2020 net earnings were lower than the same periods in 2019, primarily due to significantly lower crop nutrient prices. This was mostly offset by strong Retail revenue and gross margin growth, higher crop nutrient volume sales, solid operational results, and the benefit of an asset retirement obligation change in estimate. COVID-19 had limited impact on the group’s business in the period.
• In the second quarter and first half of 2020, the group’s Retail Ag Solutions delivered record EBITDA. First-half EBITDA was up 20% on a YoY basis as a result of double-digit growth in revenue and gross margin, and EBITDA margins surpassing 10%. Further, sales through digital retail platform exceeded US$700 million in the first half of 2020, surpassing the group’s annual goal of US$500 million in the first six months of the year. Second-quarter online sales accounted for 45% of North American sales.
• The group reported that the global potash buying increased meaningfully following the signing of the China and India potash contracts. With strong demand in most key regions, many producers have announced that they are now sold out through September 2020, and Brazilian prices have rebounded by over US$30/mt from low values in the second quarter of this year. The company maintained its projection for 2020 global potash shipments between 65 and 67 million tonnes.
• The global urea demand has been supported by strong consumption in many key regions, particularly in India. Chinese urea exports continue to be lower year-over-year; however, the company expect the pace to increase in the second half of 2020. Ammonia prices have continued to be held back by weaker-than-normal industrial demand in the Western Hemisphere, while improved industrial utilization in Asian markets is supporting both demand and prices in that region.

Technical Analysis

Source: Refinitiv (Thomson Reuters)

• The stock was trading above the crucial short-term as well as long-term support levels of 10-day, 20-day, 30-day, 50-day and 200-day SMAs, which indicates a bullish price trend.
• The Moving Average Convergence Divergence (MACD) is rising and hovering above the 9-day SMA, a positive price momentum.
• The gap between 12-day and 26-day EMA is positive, which is another bullish price trend.
• The leading momentum indicator 14-day RSI is hovering in neutral territory.

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%. Further, 7 out of 10 shareholders have increased their stake in the group.

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

Peer’s Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation:

Nutrien recorded decent second quarter and first-half results backed by solid growth in Retail Ag Solutions earnings and excellent operational performance across Potash and Nitrogen business units. The group's competitive advantages were apparent in the second quarter, including the quality of its assets and impressive free cash flow generation, even at the bottom of the commodity cycle. Its digital platform continues to exceed expectations. Moreover, the group now expect to reach US$1 billion in online orders by the end of 2020.

Further, the company has built upon strong fundamentals, with a debt to equity ratio is substantially lower than the industry average and strong interest coverage ratio of 4.20x implies no balance sheet risks.  Also, the financial strength of the company can be gauged by looking at the free cash flow yield, which is at 6.5%, providing a strong margin of safety and cushion to the existing and potential shareholders.

Moreover, the company has a consistent track record of dividend payment, and at the last traded price, NTR shares were offering a lucrative dividend yield of 4.37%, which is significantly higher given the lower interest rate environment. Also, its shares are hovering a bullish price zone, as its shares traded above crucial short-term as well as long-term support levels of 10-day, 20-day, 30-day, 50-day and 200-day SMA

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 54.99 (September 18, 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 8.24x on the FY20E Cash Flow Per Share.

 

*Recommendation is valid at September 21, 2020 price as well.

*Please be aware dividend is variable and not guaranteed.

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