Our view: We believe Nutrien should continue to benefit from very positive ag/fertilizer market fundamentals and think shares should trade well- above pre-Ukraine/Russia war levels. We see nitrogen prices set for a rebound in H2 and still very tight potash markets that support elevated prices. We continue to expect high FCF yield, estimating ~20% in 2022/23 with our price deck and ~30% at spot prices.
Key points:
Q2/22 slower US spring volumes, but margin and prices stay strong; RBCe EBITDA $4.7B vs. $5.0B consensus: A weather-impaired US spring hurt pre-plant farm activity, which likely resulted in lower volumes. However, overall margins remained high due to still strong fertilizer prices and farmer demand for premium products given favourable crop economics.
Ag/ferts still very constructive; trimming 2022 estimates, but raising 2023: We have trimmed 2022 estimates on early-season weather impacts, but still see Nutrien's guidance ($14.5-16.5B vs. $15.0B RBCe) as achievable and raise our 2023 estimates on a stronger nitrogen price outlook.
• Crop economics remain favourable, support for crop input demand: Farm economics remain attractive and crop prices are still well-above historical levels, which should support solid fertilizer demand. We also note potential for US drought presenting upside risk to crop prices.
• Potash supply remains heavily restricted: Our work tracking vessel loading data estimates Russian potash exports at ~60-70% normal (note here) and we also see Belarusian export restrictions as potentially tighter than we anticipated for the next 3-4 years (note here). We have lowered our 2022 Brazil potash forecast slightly to $935/tonne, from $950/tonne, and maintain 2023 at $750/tonne.
• Nitrogen set for H2 rebound, high EU nat gas may keep prices strong into 2023: We lowered our 2022 US NOLA urea forecast to $615/ton, from $650/ton, but raise 2023 to $600/ton, from $550/ton. Demand should pick up through Q3 and crop economics remain attractive. On supply, returning Russian and Chinese exports have pressured recent prices, but the latter remains restricted. Meanwhile, EU natural gas has returned to near record levels at ~$50/mmbtu, implying top-end global marginal cost at >$1,250/tonne, and we think more plants may shut down and/or prices need to move higher to accommodate higher costs.
Solid cash generation with potential upside if potash prices hold: We forecast attractive FCF generation at ~20% yield in 2022/23 ($8-9B FCF) and run-rate 30% yield at spot prices. We expect Nutrien to be active in share buybacks and to see another dividend increase later this year.
Reiterate Outperform and $135 PT: We lower 2022E and raise 2023E EBITDA to $15.0B and $14.6B, from $15.2B and $13.8B.