Nutrien Ltd.

Nutrien Ltd. (TSX: NTR) is a leading agriculture chemical company and is engaged in the production and distribution of potash, nitrogen, and phosphate products for agriculture and industrial customers worldwide.  The company is the largest agricultural retailer in the United States. Nutrien’s operational geographies include the United States, Canada, South Africa, Australia and South America.

Key Highlights:

Higher Financial Flexibility through prudent Capital Management: The company has s strong balance sheet with superior cash flow levels, which lead to a robust liquidity position, despite an ongoing sectoral weakness. During FY19, the company has returned ~USD 3 billion to its shareholders through dividend payments and share purchase. During the first nine-months of FY20, the company paid USD 771 million through dividends, which is impressive looking at the current macro-dynamics. Moreover, the corporation repaid USD 500 million of notes during the year, which is a key positive and shows financial flexibility. Over the years, the group’s margin was supported by improved cash flows driven by healthy crop prices & affordable crop input prices.

Capital Management and Dividend payment (Source: Company Presentations)

Historical Prices of Crops (Source: Company Presentations)

Revival in demand: The company reported a decent third quarter, driven by higher fertilizer sales volumes coupled with increasing traction from the digital agriculture platform, surpassing CAD 1 billion of sales. The Management expects the demand to pick-up in the foreseeable future, which would likely to support the crop and fertilizer prices. Most of the crop prices has shown revival in the recent past, which is impressive. For example, price of Brazilian Soyabean grew ~75% from May 2020, to October 2020 while palm oil and US Cotton were up by ~51% and ~19%, respectively during the same time frame. Moreover, the demand for crop inputs is likely to remain elevated in FY21, which would further support the overall performance.                                     

Quarterly Price Trend (Source: Company Presentations)

Q3FY20 Financial Highlights:

• NTR announced its third quarter FY20 results, wherein the company posted revenue of USD 4,205 million, as compared to USD 4,169 million in the previous corresponding period. Despite a demand destruction scenario, the company retained its income, aided by a 9% y-o-y growth from its retail segment, which represents the majority revenue.
• Adjusted EBITDA stood lower at USD 670 million, down 15% on y-o-y basis, due to a slide in the crop nutrient prices, offset by higher operational efficiencies.
• The company reported a net loss of USD 587 million, as compared to a net profit of USD 141 million in the previous corresponding period, primarily attributable to a USD 823 million related to the impairment of assets.           

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: 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.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The future growth is likely to be supported by strong demand dynamics within the corn segment particularly from China and Brazil, coupled with improved demand for Urea from India which would drive the global urea market as well. Global Potash demand is expected to remain elevated in the foreseeable future, while higher soybean prices are likely to support the realizations and overall margins too. Further, At the last traded price, the stock was offering a lucrative dividend yield of ~4.58%, which would attract several income investors. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered industry (Chemicals) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 52.67 on November 5, 2020.

NTR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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