Solid quarter on the path to recovery
Our view: We think Nutrien delivered a solid Q3 result that hit all the right notes — potash improvement, Retail margin recovery, and further capex discipline. We view shares as undervalued, implying a 1-2x EV/ EBITDA multiple discount to peers on the fertilizer business. We see more stable company and fertilizer market performance as the path to restoring investor confidence and a recovery in valuation.
Key points:
Potash set for recovery into 2024, although L-T supply looms: We expect demand to recover into 2024 given stronger affordability and two years of under-application while inventory levels are back to normal. On supply, we see less incremental volumes next year from Russia, which we believe is already back to pre-Russia/Ukraine war export levels, and Belarus, which we currently peg at 70-80% of pre-war levels. We think this dynamic should result in a volume recovery and support relatively stable prices near current global levels at ~$300-350/tonne. Long-term, we see the market as generally balanced if demand returns to the historical 2-3% growth level, but believe expectations for accelerated new supply from BHP Jansen weigh on sentiment and result in potential market risk if demand falters. As a result, we lower our potash segment multiple to 6x, from 7x, previously.
Retail set for bounce back: We expect a strong recovery in Retail segment EBITDA in 2024 ($1.9B vs. $1.5B in 2023), as crop nutrient margins recover and normalize above prior historical levels due to growth in proprietary products while crop protection margins stabilize as high-cost inventory has been worked through the channel. Q3 results showed the first signs of this recovery, with crop nutrient margins up significantly from H1/23. Additionally, crop prices remain high, which should drive strong farm level activity into next year.
Strong cash flow backed by stable ops and lower capex: We forecast solid cash generation (10-11% FCF yield in 2024/2025), which should support a balanced capital allocation approach with potentially $1B available for buybacks in 2024 along with a moderate dividend increase. We note 2023 capex plans were trimmed again to $2.7B, from $2.8B, a good sign for capital discipline being instilled across the company.
Shares imply low valuation on fertilizer business: We think Nutrien shares are undervalued, especially the implied valuation on the fertilizer business. Assuming 9x EV/EBITDA on our 2024 Retail estimates, shares imply a 5x multiple on fertilizers. If we assumed an 11x multiple on Retail in-line with the average for ag and distribution peers, shares imply a 4x multiple on fertilizers. For context, fertilizer peers CF and MOS trade at 7x and 6x.
Reiterate Outperform, lower PT to $80 (from $85): We maintain 2024E and 2025E EBITDA at $6.3B and $6.7B.