Have a US$76.00 target. GLTA
Focus On Earnings / FCF Quality – Q1/24 Review Our Conclusion
Following a very tumultuous H2/22 and 2023, fertilizer prices have largely
normalized. A more stable price environment should lead to an environment
of more predictable and consistent results (as evidenced with NTR’s Q1/24
results), and in turn should lead to a continued recovery in the valuation
multiple. We see fertilizer pricing at marginal cost and thus don’t see
substantial further downside to pricing (in particular potash). At this point, the
focus for the company is on operational efficiencies, enhancing
earnings/FCF quality, and share buybacks (we forecast ~$1B in FCF after
dividend available in 2024 for share buybacks or tuck-in M&A). We are only
tweaking our forward estimates. Our NAV-based price target of $76 remains
unchanged and we reaffirm our Outperformer rating. We still believe there is
a strong valuation argument with NTR trading at ~7.3x consensus 2025E
EV/EBITDA (vs. historical range of 8.0x-8.5x).
Key Points
Balanced Potash Markets: NTR sees global potash supply/demand as
balanced, and maintained its global shipment forecast of 68Mt-71Mt for 2024
(~2Mt increase Y/Y), supported by demand growth in regions such as
Southeast Asia and Latin America (excluding Brazil), offset partly by China.
Roughly half of the global demand increase should be supplied by
Russia/Belarus, with the other half split between Laos and Canada. Overall,
we expect fairly flat potash pricing for the balance of the year. While the
potential Canadian rail strike does pose a risk to NTR’s Q2/24 potash
volumes, NTR notes that its F2024 potash volume guidance of 13.0Mt-
13.8Mt (unchanged) does include some strike risk as well.
Improved Nitrogen Operational Performance: NTR reported strong
Nitrogen segment results in Q1/24, benefitting from low gas costs (lightly
hedged in the quarter) and product mix optimization resulting from better
ammonia production. With the drop in gas prices in Q1/24, NTR has hedged
a portion of its North American gas requirements for the remainder of 2024.
NTR’s F2024 nitrogen volume guidance remains at 10.6Mt-11.2Mt,
representing a ~500kt Y/Y improvement at the midpoint, with the majority of
the growth planned for upgraded products such as urea and nitrogen
solutions. NTR expects brownfield expansion and reliability projects will
ultimately support its mid-cycle nitrogen sales of 11.5Mt-12.0Mt.
Enhancing Quality Of Earnings/FCF: NTR is taking several steps to
improve earnings quality, including improving the reliability of its Nitrogen
operations (Q1/24 ammonia operating rate improved to 92% vs. F2023 level
of 88%), investing in mine automation at its potash mines which contributes
towards cost reduction and productivity increase, and initiating a process to
divest its Retail assets in Argentina, Chile, and Uruguay. Other measures to
improve earnings quality include focus on proprietary products (high growth
areas such as biostimulants, nutritionals, etc.), network optimization, and
digital capabilities