The Nufarm Limited (ASX: NUF) share price gave up all of Thursdays's gains with the stock slumping with the broader market.
The Nufarm share price tumbled 2.9% to $4.88 in after lunch trade while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fell 0.3% with fellow agribusiness Graincorp Ltd (ASX: GNC) suffering a 6% sell-off on a shock profit downgrade.
Nufarm could be dragged lower due to Graincorp – after all, it did also announce a profit downgrade along with a capital raise yesterday – but the sell-down but this could be a buying opportunity as top brokers are bullish on the outlook for Nufarm.
Removal of an overhang
Morgan Stanley reiterated its "overweight" call on the stock with a price target of $6.80 following yesterday's announcement.
"NUF's downgrade was disappointing but largely anticipated by the market. Offsetting this, the preference share transaction has removed the risk of a large equity raise," said Morgan Stanley.
"With two of the most significant concerns removed, investors can now focus on inherent longer-term value in NUF."
The company raised around $98 million by issuing preference shares to its largest shareholder, Sumitomo Chemicals.
Trading on attractive valuations
Citigroup also believes that the fresh funds will more than offset the challenging operating conditions for the group.
"The funds raised should ease balance sheet concerns, in our view, with NUF estimating that ND/EBITDA [net debt to earnings before interest, tax, depreciation and amortisation] post placement will be around 3.0x, comfortably below bank covenant levels (c3.5x)," said the broker.
"Sumitomo's support in the placement also confirms its long term commitment to NUF, in our view, which may have been in doubt given its non-participation in the past two equity raisings."
Based on Citi's revised estimates, the stock is trading on a enterprise value to EBITDA (EV/EBITDA) multiple of 6.6 times, which is significantly below its historical average of 8 times. The broker retained its "buy" recommendation on the stock but trimmed its price target by 20 cents to $6 a share.
Credit Suisse was also pleasantly surprised by Sumitomo's offer of capital and it too has kept its "outperform" rating on the stock as it believes Nufarm is trading on an undemanding valuation.
"Whilst a capital raising and guidance downgrade was widely expected by the market, Sumitomo's support was probably under-estimated," said the broker.
"With an earnings downgrade based on North American weather impacts unsurprising and consistent with recent peer reporting, removing balance sheet risk from the table is a clear positive."
While Credit Suisse lowered its price target to $8.24 from $8.90 a share to account for the dilution from the capital raise, there's still plenty of gas left in the tank.
