CIBC Top PickEQUITY RESEARCH
January 11, 2023 Earnings Revision
2023 Agriculture, Fertilizer & Chemical
Outlook
Robust Ag. Fundamentals Support Another Solid Year
Our Conclusion
Historically during a recessionary environment, fertilizer and ag. equipment companies’ share price performance has been largely in line with the broader market, while chemical stocks have underperformed the market (typically early-cycle performers). But we expect somewhat of a different outcome in 2023, particularly in a mild recession scenario. We see the global buildout of grain infrastructure, the positive outlook for North America and Brazil agriculture (increased demand for ag. inputs, equipment and seed), a continuation of the ag. machinery cycle (North American HHP tractor inventories remain low), rebounding potash demand in late Q1/23-Q2/23, and high energy prices (particularly in Europe) providing a higher-than- historical floor to chemical prices as key themes for 2023. We see AFN, NTR and CHE.UN as best positioned to benefit from these themes.
Key Points
AFN is our highest conviction story for 2023, given our expectations of strong organic revenue growth (we forecast double-digit revenue growth in 2023 and 2024) from continued market share gains and broad-based strength in U.S. and Canadian farm, North America commercial, Brazil and India. We expect the new management team to focus on operational efficiency and debt reduction (AFN is targeting a low 3x net debt/EBITDA ratio by the end of 2023). We are raising our price target from C$53 to C$62.
We expect CHE.UN to benefit from strong chlor-alkali and chlorate margins in 2023 given continued elevated electricity prices in Europe and Asia. We expect improved demand for ultra-pure acid as the semiconductor industry continues to look to “onshore” its supply chain towards North America, and expect more updates on green hydrogen monetization in 2023. The balance sheet is in good shape (net debt/EBITDA of 2.4x vs. ~6x last year), and we see no issues for CHE.UN funding its organic investments and paying out its dividend (6.2% yield). We are raising our price target on CHE.UN from C$11
to $12.
For NTR, while we are at the low end of estimates for Q4/22 and 2023, we expect mid-cycle fertilizer prices to be higher than historical levels given higher energy prices and continued Belarussian potash supply constraints. At this point, we are keeping our DCF-based price target unchanged at $106. There is a valuation argument to be made, as NTR is trading at just under 6x ’24 EV/EBITDA. If we were to apply an average mid-cycle EV/EBITDA multiple (~8.5x based on Agrium’s and PotashCorp’s historical pre-merger 2010-2017 average multiple) to our 2024 estimates, we would arrive at a value ranging between $115-$120.