Key points:
Operational improvements taking hold: We think Q1 showed indications for operational improvement across the business. Retail gross margins at 23% were the highest on record for Q1, with crop nutrient and crop protection margins up vs. last year — Q1 is a seasonally slower quarter, so we're cautious about extrapolating too much, but it was a good start to a year in which we are looking for a Retail margin recovery. Nitrogen operating rate at 86% was the highest since mid-2022, due to better gas utilization at Trinidad and recent work at Borger/Geismar. Potash controllable costs remained low at $56/tonne despite ongoing inflationary pressures.
Potash stabilizing and nitrogen still constructive: In potash, we see prices relatively stable with demand pacing supply, keeping prices in the $300-325/tonne globally. We expect India to settle a contract at $280-290/ tonne shortly, with potential for a Chinese contract settlement by June/July given strong domestic demand. In nitrogen, we are long- term constructive for North American producers using low-cost natural gas, but expect a continued seasonal pullback into mid-year as demand slows and Chinese exports return to market. However, we think the market is already approaching lows with ~10% downside for urea into marginal cost support from EU natural gas prices that have stayed elevated while returning Chinese export volumes may not match prior-year levels.
Solid cash generation supports dividend, moderate buybacks/growth:
We forecast solid cash generation, at $1.5B and $1.9B FCF in 2024E and 2025E (5% and 7% yield), supported by stable earnings and declining capex spending plans. We expect cash flow to continue supporting overall $1.0B dividend payments (with per share increases along with buyback pace), moderate buybacks, and Retail growth (organic and inorganic).
Valuation gap has narrowed, cash conversion in focus: Nutrien shares have outperformed peers and narrowed the relative valuation gap, currently trading at 7.5x on F12-month EBITDA and ~7x when adjusting for seasonally higher working capital in Q1 vs. CF at 7.5x and MOS at 6.0x, although still below historical at 8.0x. We think investors are looking for improved cash conversion which could help lift valuation.
Reiterate Outperform, $70 PT: We maintain 2024E and 2025E at $5.6B and $6.0B.