From high flyer to serial disappointment

Chalkie

OPINION: Any New Zealand company contemplating shifting from the local exchange to Australia will now have to fight the "Nufarm factor".

Older and wiser readers will remember a New Zealand-listed company by the name of Fernz that was in the main locally well- regarded - apart from a scandal involving alleged insider trading by Kerry Hoggard, one time CEO and recent chairman of the company, in Fletcher Challenge shares.

Oh, and a $1.9 million fine from the Commerce Commission for rigging pricing in the timber treatment market.

About the turn of the century Fernz changed its name to Nufarm and shifted its primary stock exchange listing to Australia.

For a while the shares were a little homeless, but eventually the Aussies warmed to the company with its popular theme of coat- tailing the increasing demand for food around the world.

The shares made it into the all- important ASX 200 index, volumes rose and, most importantly, the share price soared from a bit over $2 to highs of $16+ during the first decade of being Aussiefied.

Hopefully, the resignation of Kerry Hoggard earlier this month from the chair will see the Aussies forget the Kiwi association of this serial disappointer.

Chalkie presumes Kiwis still own a reasonable percentage of the company.

The company issued $251 million of preference shares in 2007 through a New Zealand subsidiary and a good proportion of those are owned locally. Thanks to Nufarm's halving of its profit prediction last week from $110 million-$130m to $55m-$65m and breaking of a banking covenant, these notes now trade at 62 cents in the dollar.

The company has lost all credibility with its fifth profit downgrade in a little more than a year. In the world of agriculture such disappointments happen but unfortunately CEO Doug Rathbone has during this time sold large dollops of shares while making forecasts which have turned out to be over-optimistic.

He has raised in total $160m and when selling the last $25m commented that he needed to do so to retire debt. God knows what he did with the earlier proceeds, although his family company has gone reasonably big in the Aussie wine industry.

As far as Chalkie can see Mr Rathbone has thankfully never claimed any Kiwi heritage.

Nufarm recently did a tricky deal whereby Japanese company Sumitomo bought 20 per cent of the company via a $14 a share tender offer to existing shareholders who were then invited to participate in a rights issue at a much lower price, the obvious conclusion being they would reinvest some of the proceeds from Sumitomo. It was only near the end of this process that the company made a statement that Mr Rathbone would not be taking up his rights even though the application price was a reasonable margin below the market.

Chalkie has seldom seen a better example of watching what executives do rather than listening to what they say.

Chalkie doesn't begrudge managing directors the right to sell shares, particularly where the vast majority of their wealth is tied up in the company and they are nearing retirement.

But where Nufarm gets interesting is in the period from the May 15, 2009, placement onwards.

Why? Because a key competitor has for some time been effectively giving investors the steer that Nufarm will struggle and the Aussie company has been denying it.

Nufarm's main product and historically big money earner has been the weedkiller glyphosate which is best known by the trade name "Roundup", as it was dubbed by Monsanto, which patented the chemical in the 1970s.

When glyphosate came off patent Nufarm made a mint by producing and selling generics and "cocktail" solutions containing glyphosate and other chemicals.

The May 2009 $300m placement and sell-down of 1.75 million shares by Mr Rathbone was just a little too close to Chalkie's liking to key announcements by Monsanto in May and June 2009.

At a May 27 conference Monsanto talked of glyphosate market volumes falling 20 per cent. By the time of its June quarterly conference call Monsanto went further on the train wreck that was the glyphosate market (high inventories, falling selling prices) and also stated a strategy of taking its own selling price down and trimming costs.

Monsanto forecast that its own gross profit from glyphosate would halve over the next three years. A halving of gross profit would move most products/firms from profit into loss.

In other words, Monsanto was saying the glyphosate market was a complete mess and that it was sick of generics taking market share so it was going to lower its prices and adopt a lower margin/low cost model with obvious implications for competitors.

One presumes that the trends that Monsanto saw and that influenced the development of a new business strategy would have been evident in the market for some time. Nufarm simply reiterated an earlier profit prediction of $220m when raising the $300m. It eventually made $80m for the July year.

Shortly after Monsanto's first comments Nufarm presented at a conference and put up a slide on the glyphosate market entitled "Short term or structural? We think mostly short term".

In May this year Nufarm put out a press release after Monsanto downgraded its earnings.

"Nufarm has commented [Chalkie: in a web cast] that the adjusted earnings guidance relating to Monsanto's business has limited implications for Nufarm's own business and earnings outlook." Two months later and the company has halved its earnings guidance. Nufarm has throughout the past 15 months talked up its diversification away from glyphosate, attributed losses from this area as "one-off" and predicted recovery. But whenever the numbers have come in they have disappointed.

One could come to the conclusion that investors would be better off following Monsanto than Nufarm in terms of forecasting profits. Or that they would be better off watching Rathbone rather than listening to him.

- © Fairfax NZ News