On May 2nd /08 Agrium Inc. (AGU: TSX) reported its Q1/08 results.
Company Profile (from Reuters)
Agrium Inc. (Agrium) is a global producer and marketer of agricultural nutrients, industrial products and specialty products, and a retail supplier of agriculture products and services in North and South America. Agrium produces and markets three primary groups of nutrients: nitrogen, potash, and phosphate, as well as controlled-release products and micronutrients. The Company operates through three business segments. The Retail segment markets crop nutrients, crop protection products, seeds, custom application and other agronomic services to customers through 444 outlets in the United States, Argentina and Chile. The Wholesale segment manufactures, purchases and markets a range of nutrients, including nitrogen-based, potash and phosphate-based crop nutrient products. The Advanced Technologies segment consists of crop nutrient technologies and professional products, including the controlled-release crop nutrient and professional products businesses of Nu-Gro and Pursell Technologies.
Takeaways From The Event
For Q1/08, Agrium announced a profit of $195 million, ($1.23 a share), compared to a loss of $11 million, (8 cents a share), from a year earlier. The company also reported that construction had to be halted at the nitrogen facility (that is slated to boost capacity by 20% in 2010) it was building in Egypt due to environmental issues raised by neighbouring communities. Commenting on Agrium’s future outlook during a conference call, Chief Executive Officer Mike Wilson said “We believe the best is yet to come as we look to the second half of 2008 and into 2009.” (Reuters) Wilson also guided towards earnings per share of $3.15 to $3.45 in H1/08 (or US$1.92 - US$2.22/share for Q2/08). With regards to Agrium’s acquisition of UAP, on May 5, 2008 the company reported its wholly-owned subsidiary, Agrium U.S. Inc., has completed its tender offer for UAP Holding Corp. (NASDAQ: UAPH). As of May 2, 2008 approximately 52.17 million shares had been tendered, representing 98.5 percent of UAP’s outstanding shares.
Responding to Agrium’s Q1/08 results, TD Newcrest analyst Paul D'Amico writes “...better than expected pricing was evident in both nitrogen and phosphate, but retail’s execution was a big positive. For instance, the retail fertilizer volumes were actually down ~15% year over year due to wet weather, yet pricing execution outpaced the lower volumes, especially through March. Notably, this is the first time that the retail segment has contributed a positive EBIT in Q1, a seasonally slow quarter.”
Regarding Agrium’s outlook, D'Amico writes “Management is guiding for Q2/08 EPS of US$2.11 to US$2.41 (adjusted basis to exclude stock-based compensation expense), which is essentially in-line with current consensus of US$2.34. However, we note that the guidance does NOT include any estimated contribution from UAP. For comparison, our Q2/08 EPS estimate is US$2.65, excluding any stock-based compensation impact, but clearly reflecting positive increment from UAP and believe there is potential for positive surprise to even our estimate.” As a result, , D'Amico boots his earnings estimates to “reflect the stronger than expected Q1 result, better retail pricing realizations, and incorporating our recent higher potash price forecasts. As such, our EPS estimates are increased to US$6.48 (was US$4.66) and US$7.40 (was US$5.52) for ’08 and ’09, respectively. We are maintaining our consolidated target multiple of 10x (derived on a sum-of-the-parts basis), but the higher profit potential lifts our target price to S$125/share (was US$98). BUY rating is unchanged given strong sector fundamentals, improving business model, potential for positive surprise, and a low current valuation presenting an attractive risk/reward.”
Another analyst who covers Agrium is Jacob Bout of CIBC World Markets and he writes “We adjust our Q2/08 earnings to US$2.10 from US$2.88 as we account for the seasonality in Agrium’s sales with more sales than expected occurring in Q1/08. Our second quarter estimate also does not include any contribution from UAP. Overall, for 2008 and 2009, our EPS remains unchanged at US$6.44 and US$7.40 respectively. We maintain our US$110 price target and Sector Outperformer rating. We derive our US$110 price target by applying a 15x multiple to our 2009 EPS estimate of US$7.40. Our target multiple is a reflection of the sustained bull market for corn and is within historical ranges. We believe Agrium should not only benefit from its wholesale operations but also from its U.S. retail operations.”
Lastly, in response to Agrium’s Q1/08 numbers Citigroup Fertilizers and Agricultural Chemicals analyst Brian Yu writes “The majority of 2Q shipments (~80%) are already priced, but AGU's order book is only 5% filled for 2H08, implying significant exposure to high spot prices further out. AGU seems well positioned to benefit from likely high spot fertilizer prices in 2H08 as continuing strength in crop prices incentivize farmers to demand more fertilizers.”
Yu rates “Agrium Buy/Medium-Risk (1M) based upon a strong outlook for North American fertilizer demand in 2007/08, the company's favorable natural gas position serving premium markets, and pipeline of upstream growth projects. Our positive industry thesis is driven by expectations for a continued decline in global grain inventory through 2009/10, which we believe provides a good leading indicator of higher fertilizer demand and grain prices (important for the farmer who buys fertilizers). North America accounts for 90% of revenues following the Royster-Clark acquisition, and we expect the company to benefit from a recovery in North American fertilizer demand and new ethanol plants that use fertilizer intensive corn as feedstock. Nitrogen should continue to generate solid profits in 2008 due to Agrium's advantageous natural gas positions in Canada and Argentina. Alberta facilities serve premium priced Canadian and northern US markets. Only 9% of nitrogen product capacity resides in the US.”
Yu bases his $101/sh target on “a straight average of Price-to-Forward-Earnings (P/E) and Discounted Cash Flow (DCF) targets.” He writes “Our composite of fertilizer companies have traded at 8x-30x P/E (peak to trough) with a median of 14x since 1995. We are applying a 11.0x multiple on our 2009E earnings to arrive at a value of $115. DCF modeling yields a target price of $87. Our DCF model incorporates our detailed EBIT estimates through 2010, a cyclical 2% EBIT decline in 2011 no growth in 2012 and a 5% increase in 2013, and a long-term growth rate of 2%. Our WACC of 10.4% is based on a beta of 1.50, equity risk premium of 4.9%, and risk-free rate of 3.5%. Terminal value accounts for 58% of the overall value so changes to our 2010 EBIT assumption have a meaningful impact on DCF valuation.”
My Take: The weekly and daily RSI-7 values are at 62.68 and 52.55 and proclaim a Sell signal. Agrium had a number of operational mishaps in 2007 and I think the management needs to be held to at least 2-3 quarters of consistency and profitability before investors dive in headfirst.
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page in the comments section.
|