Why now might be the right time to plant Nutrien Ltd. in your portfolio
Maybe it has something to do with the name change, but more likely it is the result of a persistently weak market for fertilizer ingredients.
Any way you slice it, Nutrien Ltd. has been buried in the back of many investors’ minds since it was created through the US$36 billion mega-merger of Agrium and PotashCorp of Saskatchewan early this year.
But things could be about to change, thanks to a recent rally in potash and nitrogen prices that has pushed Nutrien’s shares back up toward the level at which they began trading post-merger.
“Potash prices continue to surprise to the upside, in our view, benefiting from near-record demand and generally lethargic new supply,” said Steve Hansen, an analyst at Raymond James.
His price target of US$65 per share represents 20 per cent upside to Wednesday’s closing price of $54.32 in New York and is the highest of 20 analysts tracked by Bloomberg.
Hansen sees better-thanexpected Chinese contract prices for potash on the horizon, based on comments out of the recent International Fertilizer Association conference. Chinese prices are an important benchmark, as they traditionally set the global floor price for upcoming quarters.
Whereas important spot markets for potash historically soften during contract negotiations with China, this time around they are rising, demonstrating the importance of the current market tightness.
“Global demand growth is very strong. It was strong last year, it was very strong this year,” said Corrine Ricard, senior vice-president, commercial, at Mosaic Co.
The top producer and marketer of phosphate and potash crop nutrients noted several other dynamics affecting the market, including the idling of its phosphate processing plant in Florida, and slower project ramp-ups in Saudi Arabia and Morocco. “That, combined with these lower Chinese exports, are creating a pretty tight supply and demand,” Ricard said during the company’s first quarter conference call.
Nitrogen prices have also rallied, climbing approximately 25 per cent in the past four weeks. That can be attributed to solid global demand (U.S., Europe and Brazil), sharply lower import volumes stemming from fewer Chinese exports, and the anticipation of Indian government demand re-entering the market.
Meanwhile, phosphate prices have held up impressively well following sharp gains during the winter, as new supply has been slow to emerge, demand in the U.S. and Latin America is strong, and global inventories are tight.
This prompted Hansen to raise his recommendation on Nutrien to strong buy, only six weeks after his previous upgrade. The recent rally in global fertilizer prices handily exceeded the analyst’s prior estimates, as positive demand fundamentals continue to outpace supply.
“We believe the residual downside risks associated with Nutrien are now greatly outweighed by the longer-term, cyclical upside through 2020 — a backdrop only further enhanced by Nutrien’s ability to pull multiple strategic ‘levers,’ optimize its portfolio, grow into strategic markets, and return capital to shareholders,” he told clients.
Nutrien has also stated it could have between $6 billion and $8 billion in capital to allocate over the next three years. That factors in proceeds from the sale of equity stakes in assets such as Chilean lithium producer SQM for US$4 billion, and about $1 billion in annual excess cash flow.
The third largest natural resource company in Canada targeted $500 million in related synergies by the end of 2019. Nutrien already reported $150 million in run-rate synergies as of March 31, which was slightly ahead of schedule, but analysts like Jacob Bout at CIBC World Markets anticipated that the target could be beat.
Nutrien is likely “sandbagging ” its synergy goal, he said in a June 11 research note, suggesting the company may be trying to lower the market’s expectations. Bout foresees the possibility of more than $100 million of incremental synergies if Nutrien doubles its retail footprint, and even more from the rationalization of wholesale assets.
In addition to bolstering its product portfolio in Loveland, Colo., and expanding the capabilities of its digital platform, a key growth priority is building out the existing retail network.
Much of the third element of this strategy will happen in areas of Central and Southern Brazil, where Nutrien is targeting 30 per cent of its retail sales. With roughly $5 billion in cash due to come from the sale of various equity investments, a big capital push is expected in the South American nation, home to a highly fragmented agricultural retail market.
But Brazil represents just one of many opportunities.
The consistency of its retail business and diversified wholesale business also leads to stable free cash flow and should provide downside support for Nutrien shares, though shareholders shouldn’t forget that it’s still a commodity play.
The fertilizer giant managed to shake off weak first quarter earnings that were plagued by the very wet and cold spring season in North America. Importantly, the company didn’t lower its guidance, perhaps because it anticipated that fertilizer prices had troughed.
That sets the stage for good news out of Nutrien’s annual general meeting on July 19, and its second quarter earnings report on August 2.
Financial Post