Q3/23 preview: Stability, renewed focus on cash flow path to better valuation
Our view: We expect Nutrien continues on a path to restoring investor confidence with a renewed focus on cash generation, a balanced capital allocation plan, and stabilizing market conditions. Nutrien shares currently trade below historical average valuation, and we see potential for better valuation if the company executes well and earnings stabilize at new normalized levels. For Q3 reporting, we are looking for 2023 guidance to be maintained, Retail margin recovery, and further guidance on capex plans.
Key points:
Q3/23 nitrogen better while potash stabilized, Retail normalizing; RBCe EBITDA $1.03B vs. $1.14B consensus: Nitrogen prices performed better than expected while potash prices stabilized, but volumes were impacted by nitrogen production challenges (Trinidad gas limits, Louisiana outage) and potash port issues (Vancouver port strike, Portland conveyor accident). The Retail segment should see further normalization in margins after working through high-cost inventory through H1/23, but some lingering inventory in Brazil may remain through H2/23.
Nitrogen constructive while potash stabilized: We remain constructive on nitrogen through early-2024, with potential to exceed our price forecasts, based on renewed restrictions on Chinese exports, seasonally stronger marginal costs due to higher EU nat gas, potential for energy price upside and impacts on Middle East nitrogen exports if the Israel/Hamas situation escalates further, and supportive affordability. For potash, we see price stability with volume upside. We believe Russia/Belarus have mostly returned to market and will likely have less incremental volumes to add going forward while demand should benefit from favourable affordability.
2023 guidance likely maintained, 2024 could see a change in messaging:
We expect Nutrien will likely maintain 2023 EBITDA guidance at $5.5-6.7B given recent strength in nitrogen, stability in potash, and steady ag fundamentals. We think guidance revision headlines in 2022/2023 (both up and down) have been a distraction and too much of a focus vs. fundamental structural market changes. We would not be surprised if Nutrien moves away from providing full-year company-level EBITDA guidance in 2024, instead focusing on segments or modelling guidance, which should shift the conversation back to operational execution and market fundamentals.
Renewed focus on cash generation, balanced capital allocation: Nutrien announced a pullback in capex plans last quarter that was well-received by investors. With lower capex and stabilized market conditions, we forecast ~10% FCF yield in 2024/2025, which should support plans for moderate growth, opportunistic buybacks, and dividend increases going forward.
Reiterate Outperform and $85 PT: We maintain 2024E and 2025E EBITDA at $6.4B and $6.7B.