Post by
retiredcf on Jul 20, 2022 9:19am
CIBC
EQUITY RESEARCH
July 20, 2022 Earnings Revision
Ag. Fundamentals Solid Despite Price Volatility
Agriculture, Fertilizer, Chemical Summer Outlook
Our Conclusion
Despite the recent sell-off in grain prices, we believe market fundamentals
and farmer margins remain solid through 2023. We remain constructive on
potash (Ukraine war to impact potash supply for at least the next three
years) but less so on phosphate and methanol (think nitrogen found a
bottom). Top picks are NTR (valuation), AFN (solid backlog and will benefit
from Ukraine ag-infrastructure rebuild), and CHE.UN (optionality from
ultrapure, green hydrogen, and North Vancouver sales-lease back
opportunities).
Key Points
NTR: We have adjusted our 2022 adj. EBITDA estimate slightly lower from
$15.25B to $15.0B (vs. NTR’s 2022 guidance of $14.5B to $16.5B) to reflect
lower nitrogen prices and the compressed spring fertilizer application
window, offset mostly by stronger than anticipated potash pricing and Retail
margins. Our 2023 estimates remain unchanged, but we have lowered our
price target from $127 to $112 with the raise in discount rates used in our
DCF model. That being said, we believe the current valuation is unwarranted
(below pre-invasion prices and well below historical valuation).
MOS: We trim our H2/22 estimates to reflect the further softening of forecast
phosphate prices. Our target falls from $69 to $58 with the raise in discount
rates in our DCF model. Note MOS has the highest earnings leverage (on a
dollar-invested basis) to potash pricing amongst large fertilizer peers.
AFN: Our conversations with management reveal that backlog continues to
be strong across most regions and segments, and AFN continues to win
market share in the U.S. and Brazil. Inflation is less of a concern now for
AFN, given that steel (biggest cost component) prices are well below H2/21
peak levels, and will be a tailwind to margins in H2/22 and 2023. We expect
management to confirm 2022 guidance along with Q2/22 results.
CHE.UN: We continue to believe that CHE.UN’s 2022 financial results
should be strong (we are at the high end of 2022 guidance) but have
trimmed our 2023 results, given the increased likelihood of a recession. Our
price target declines to C$9.75 from C$10.50.
MEOH: While we like MEOH’s strong FCF profile in 2022 (highlighted by
MEOH’s recent 20% dividend hike and strong pace of share buyback), we
see rising risk to 2023 results due to macro-concerns/potential recession and
our expectation of the continued weakening of methanol prices. Further, a
potential Russia/Ukraine conflict settlement could reverse the support
methanol prices have had from elevated energy prices. We reduce our 2023
adj. EBITDA estimates by ~10%. We lower our price target to $45 from $56.