Our view: We believe Nutrien and ag/fertilizer markets are on the path toward stability, although we see 2024 as a transition year toward an improved outlook. We think the combination of steady improvement, continued focus on execution, and cash generation should support moderate capital return and a path to continued valuation recovery.
Key points:
Potash stabilizing, with potential for volume growth in 2024. Global potash markets have started the year mixed, with North America continuing strong trends from Q4 while international markets continued to soften, but we think there is limited downside from here given marginal cost support for international prices and favourable affordability. For 2024, we trim our realized prices to $245/tonne, from $271/tonne, to reflect a soft start to the year, but we maintain our sales volume forecast of 13Mt, relatively flat vs. 2023 volumes. Longer-term, we continue to see the potash market as balanced, with new supply paced by steady demand growth.
Nitrogen markets remain constructive while ops improve. We continue to see a favourable nitrogen dynamic for North American producers that benefit from low-cost US natural gas while global prices remain supported by marginal cost based on still-high European natural gas prices. For 2024, we expect typical seasonal price strength into the Northern Hemisphere spring season and then softening into the seasonally slow Q3 as demand slows, Chinese exports rise, and European natural gas prices cool. Specific to Nutrien, we expect higher volumes of 10.8Mt in 2024 vs. 10.4Mt in 2023 due to recent debottlenecks and better gas availability in Trinidad, along with lower natural gas costs that partially offset lower prices.
Retail set for rebound as margins normalize. We have high confidence in Nutrien’s guidance for a Retail rebound as margins normalize after working off high-cost inventory; however, we trim our forecast slightly, to $1.76B from $1.85B, to account for a weaker start in Brazil. We also highlight that crop nutrient per tonne margins are expected to normalize at $100–120/ tonne, well above historical averages of $80–90/tonne, due to Nutrien’s investments in proprietary products.
Continuing renewed focus on cash generation and capital return. We expect Nutrien to remain focused on cash generation, with capex down to $2.2–2.3B in 2024 (from $2.6B in 2023) and potential for further reductions to $2.0B by 2025 as investment projects (potash automation, nitrogen debottlenecks, Retail digital) are completed. We forecast FCF of $2.0B and $2.2B in 2024 and 2025 (7% and 8% yield), respectively, which should support moderate buybacks and dividend increases.
Reiterating Outperform rating, lowering price target to $70 from $75. We lower 2024E and 2025E EBITDA to $5.5B and $6.0B, from $5.9B and $6.3B, respectively.