The Nufarm Limited (ASX: NUF) share price has fallen to a fresh four-year low but this hasn't shaken Macquarie Group Ltd's (ASX: MQG) faith in the stock.
The Nufarm share price dipped 0.5% to $3.73 today, marking the fifth consecutive trading day of losses for the agriculture chemical and products group.
The stock is one of the worst performing large caps as it has lost nearly 40% of its value since the start of 2019 compared with a 12% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Litigation risks on the rise
Nufarm has been under pressure on a number of fronts. It issued a profit downgrade due to adverse weather, and more recently, had to deal with the risk of a major lawsuit stemming from the use of glyphosate after fellow chemical company Monsanto was successfully sued in the US for hundreds of millions by cancer patients who claim glyphosate caused their disease.
To be clear, Nufarm isn't named in any lawsuit but there is a growing risk that it will get swept up in the scandal.
"However, we note the issues raised aren't necessarily new. Importantly NUF does not manufacture glyphosate, rather it purchases glyphosate material from manufacturers like Monsanto to formulate into glyphosate-based products for sale," said Macquarie.
"NUF is one of many formulators and sellers of glyph-related product in Australia and US markets, with Monsanto and Chinese manufacturing the 'active' technical ingredient. We note that 143 companies have a registered and/or approved status on 600 glyphosate products in Australia with NUF having 10 registered products."
Bad news may be in the share price
The fact that Nufarm is a small player in the glyphosate market may provide some protection to the company even if the scandal widens.
This, coupled with the fact that the valuation for the stock is at a 10-year low has convinced Macquarie to stick with its "outperform" recommendation and 12-month price target of $6.38 per share.
Using Macquarie's numbers and if dividends are thrown in, the potential upside for Nufarm's share price is 73%!
There could also be upside from potential merger and acquisition activity as some out of favour stocks have attracted bids, such as Vocus Group Ltd (ASX: VOC).
"Potential risks [regarding] glyph are difficult to quantify although we note that main litigation focus has been Monsanto to date and NUF's valuation is already factoring in a substantial discount in this regard with >$400m of mkt cap wiped off specifically re glyph since first Monsanto court case award in August 2018," said Macquarie.
"It's all about the [balance] sheet in near term and June/July are seasonally important months for the business."
