Nutrien Ltd T.NTR

What's Next for Nutrien?

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1. What’s Next for Nutrien?( Scotiabank)

• It hasn’t been a fun start to the year for Nutrien, with the stock still bouncing along 52-week lows. There are plenty of reasons why investors are pessimistic - and rightfully so: (1) corn is now sub-$4.50/bu, with marginal cost in the $4.00 area - not great for lower ranked crop inputs like potash; (2) potash seems to find new lows each week, on both weaker demand and stronger FSU supply, and with no data to suggest an imminent recovery is in the cards; (3) the nitrogen story has been crushed by the EU gas outlook, which over the past few months has collapsed from $16/mmbtu through ‘24 to now $10/$11 through ‘25; (4) our revised price outlook shows N+K bouncing around current/spot levels for the rest of ‘24; (5) beyond some volume upside in N+K, there isn’t much of a growth story for NTR in our view, since it scaled back its growth narrative last August; (6) the macro may improve throughout the year, or it may not - nothing suggests it has to, especially with another bumper wheat crop now expected in Russia; and (7) the FCF outlook suggests buybacks are unlikely to exceed 10M shares this year. As a result, the market has been punishing NTR’s move toward trough-cycle EBITDA with below mid-cycle multiples!

• Being a little contrarian in ferts has historically paid off, and so we generally like when everyone has thrown in the towel. On the one hand, what we’re seeing in the fert space is similar to the market rout in forestry, lithium, and other materials sectors we cover. On the other hand, with forestry, it’s clear another cycle upswing is on the way, whereas in ferts, and for N+K specifically, we can’t say the same. Therefore, the market is correct to price in incremental doubt. This is especially true with clean ammonia and LNG capacity buildouts likely to erode the allure of North American assets, while on the potash side, the FSU is returning faster than expected, while BHP will be shipping potash in 8 to 12 quarters. Meanwhile, hiccups in retail one year ago + the need to pull back on Brazil growth has scared some of NTR’s retail multiple away - perhaps by a good 1.0x.

• Lowering our PT to $67. First, we’ve cut ‘24E/25E to $5.4B/$5.6B, or to 10%/8% below the Street. Second, we raised our multiple to 7.5x from 7.0x to acknowledge a further decline in the cycle, meaning the quality of the remaining EBITDA has increased. While we use several valuation methods to support a revised $67/sh PT (down from $75), we note that mid-cycle valuation and several SOTP approaches discussed throughout this report offer higher valuation levels.

• Here’s why we’re sticking with a Sector Outperform rating: (1) nitrogen is trading at marginal cost, with EU gas sloping ever-so-slightly higher over the next two years - essentially from $9 to $11/mmbtu; (2) potash is sub-$300 in several markets and likely going lower near-term. But, if/when we see another 10% downside in K pricing (highly likely near-term), watch for an incremental supply response to begin balancing the market, which should lead to China/India contracts - the start of improved liquidity in potash; (3) NTR at 1.0x book value has only occurred once before, when COVID-19 hit equity markets - it didn’t last long; (4) we think the market isn’t pricing in the return of any growth to story, which we should start to see return to the NTR narrative in the next 2-3 quarterly releases; and (5) we like when the market penalizes trough-EBITDA with cycle-low multiples - it also historically lasted long.

• Catalysts are hard to come, so patience is required. We don’t see anything too exciting near-term for NTR, whether on the macro front, the commodity front, or the company front. Accordingly, we expect NTR to trade sideways near-term. This is an ideal time for deep-value investors to consider the name.

  How Much More Downside Is There?

  • While its true that NTR is trading at 5.6x ‘24 Street EBITDA, our conversations with investors over the past three weeks suggest the buyside is well-aware the Street’s $6.0B is too high, with estimates likely to fall sharply. Accordingly, we think the Street is trading much closer to 6.2x our spot ‘24 EBITDA assessment of $5.4B.
  • If we assume the potash ASP falls another $40 to marginal cost, ‘24 spot EBITDA falls to $5.0B from $5.4B. Using an unchanged (and therefore punitive) 6.2x, we estimate downside closer to $45 (Exhibit 8). This compares to a 52-week low of $48 (Jan 17) and the current share price of about $50.
  • Where could we be wrong? We are assuming potash falls to marginal cost, as nitrogen is effectively there already. However, there is a risk in nitrogen that EU gas falls further, and pulls marginal cost along with it. Given the indifference level (on an energy equivalent basis) between Chinese anthracite coal and Dutch TTF, we’re not too concerned.

  What is NTR Pricing In?

  • We estimate NTR is trading at 5.6x ‘24 Street EBITDA of $6.0B (Exhibit 3). That said, and as we discuss below, the market should know ‘24 Street EBITDA is too high and will need to come down significantly. On spot ‘24 EBITDA of $5.4B, we estimate NTR is trading at 6.2x (Exhibit 4)
  • Historically, NTR has traded at 8.0x mid-cycle forward EBITDA (Exhibit 5). However, from that starting point, we have previously made the following multiple adjustments: (1) a 0.5x cut for higher discount rates market-wide for both companies and investors; and (2) another 0.5x multiple cut for the elimination of growth from the company’s narrative. This brings us to 7.0x although many investors have told us that’s still too high and should be closer to 6.5x. At a mid-cycle multiple of 7.0x (which is punitive to begin with on trough-ish EBITDA), the current $50/sh price implies about $4.8B for ‘24 EBITDA. To achieve $4.8B in ‘24 EBITDA, we would need to see a $50/mt decline in potash prices from spot, sustained for the year, and with no improvement to any other prices/margins as well. We don’t think this is realistic, given the K cost curve will be tested before then, and we’ve historically seen Canpotex and others withdraw from select markets at higher price levels.
  • NTR is trading at 1.0x book value, which we don’t often see (Exhibit 6). The historical average is about 40% higher, and we’ve only been down to 1.0x book during the initial shock of COVID-19.