NUF - Nufarm Limited

I see AUD $527 Million on Sinochem's balance sheet, and they have not quite twice that much as debt already on their balance sheet.

So how are these guys going to pull off a $3B merger proposal?

Assume that Sinochem earns roughly AUD $150M per year (that was my rough calculation for 2008 based on the Renminbi denominated financials showing on Reuters). Assume that Nufarm can add in another $150M per year. Assume they finance the AUD $3B buyout as a 10 year loan at 9% interest. That means they have AUD $450M in interest payments each year, and they cannot afford to do this deal?

Guys, can we pool together on this and maybe someone else can show me the errors in the calculation? It doesn't look to me like Sinochem can afford to do this deal.

persistentone said:

I see AUD $527 Million on Sinochem's balance sheet, and they have not quite twice that much as debt already on their balance sheet.

So how are these guys going to pull off a $3B merger proposal?

Assume that Sinochem earns roughly AUD $150M per year (that was my rough calculation for 2008 based on the Renminbi denominated financials showing on Reuters). Assume that Nufarm can add in another $150M per year. Assume they finance the AUD $3B buyout as a 10 year loan at 9% interest. That means they have AUD $450M in interest payments each year, and they cannot afford to do this deal?

Guys, can we pool together on this and maybe someone else can show me the errors in the calculation? It doesn't look to me like Sinochem can afford to do this deal.

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P.S. If the numbers above were right, the only deal they could afford to pay on a 10 year loan would be around $11.33/share, hardly enough of a premium to make a deal worth doing?

The original proposal involved private equity firms who would have been taking a stake. This fell over, largely because of the cost of and lack of credit, although there were other reasons too as you will have read.

We don't know if these or other parties will be involved this time around but credit markets have eased a bit in the meantime. I'd be a bit wary of trying to base too much on the published financials though. If the Chinese authorities think it's a good idea, the funds will be found. For that reason I wouldn't try to calculate/guess what an offer might be. A lot will depend on how much Doug Rathbone wants for his stake and whether or not "agreement" can be reached on this.

I'm holding NUF and won't be too upset if nothing comes of this, at this time.

persistentone said:

I see AUD $527 Million on Sinochem's balance sheet, and they have not quite twice that much as debt already on their balance sheet.

So how are these guys going to pull off a $3B merger proposal?

Assume that Sinochem earns roughly AUD $150M per year (that was my rough calculation for 2008 based on the Renminbi denominated financials showing on Reuters). Assume that Nufarm can add in another $150M per year. Assume they finance the AUD $3B buyout as a 10 year loan at 9% interest. That means they have AUD $450M in interest payments each year, and they cannot afford to do this deal?

Guys, can we pool together on this and maybe someone else can show me the errors in the calculation? It doesn't look to me like Sinochem can afford to do this deal.

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Are you saying something like an ant wants to make out with an elephant?
The ant may have some cash hidden so the elephant would most likely agree!

A good, balanced assessment from Stephen Bartholomeusz, who's always worth reading IMO.

http://www.businessspectator.com.au...romance-pd20090724-U95CF?OpenDocument&src=kgb

I need help reading the Nufarm cash flow statements for the last three quarters. The operating cash flow is showing massive operating cash flow losses, yet the balance sheet doesn't reflect this loss to cash. The financing section of the cash flow is showing huge repayments of debt - about $500M every six months - but again I don't see the cash part of the balance sheet reflecting this change.

It's hard to read because the operating cash flow doesn't work back from the operating earnings. Instead it pulls out of nowhere "cash receipts" and "cash payments".

How is it they are able to pay back so much debt and show such large operating cash losses, while not moving cash much on the balance sheet, and when the operating earnings are only around $75M per half year result?

NUF has an unusual balance date, 31 July, due to the particular seasonal nature of its business. It also has a very unbalanced seasonal business, typically showing a build up in inventory and borrowings in the first half and often showing a loss for this period.
I havn't seen accounts for the last three quarters and wasn't aware that NUF issued quarterly accounts but the balance sheet as at 31 July 08 showed total debt of $939m. As at 31 January 2009 it was $1655m, reflecting the above seasonal trend.

oldblue said:

NUF has an unusual balance date, 31 July, due to the particular seasonal nature of its business. It also has a very unbalanced seasonal business, typically showing a build up in inventory and borrowings in the first half and often showing a loss for this period.
I havn't seen accounts for the last three quarters and wasn't aware that NUF issued quarterly accounts but the balance sheet as at 31 July 08 showed total debt of $939m. As at 31 January 2009 it was $1655m, reflecting the above seasonal trend.

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I am still pretty confused about how to reconcile their cash flow to their balance sheet or income statement. According to Reuter's data, for the last three six month reporting periods:

Period ending Jan 31, 2008: $552.3M net debt repaid/retired
Period ending Jul 31, 2008: $452M net debt repaid/retired
Period ending Jan 31, 2009: $539M net debt repaid/retired

Does that agree with your source?

persistentone said:

I am still pretty confused about how to reconcile their cash flow to their balance sheet or income statement. According to Reuter's data, for the last three six month reporting periods:

Period ending Jan 31, 2008: $552.3M net debt repaid/retired
Period ending Jul 31, 2008: $452M net debt repaid/retired
Period ending Jan 31, 2009: $539M net debt repaid/retired

Does that agree with your source?

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Hi p.

I think you're mis-reading the data.

It looks to me like net issuance of stock/debt of $505.5m, $580.6m and $491.9m respectively for the three sixmonthly periods - from the Reuters site.

oldblue said:

Hi p.

I think you're mis-reading the data.

It looks to me like net issuance of stock/debt of $505.5m, $580.6m and $491.9m respectively for the three sixmonthly periods - from the Reuters site.

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I read it backwards you are right. So they took down that much debt, and increased cash accordingly. But the balance sheet doesn't show increasing cash balances. Income statement also doesn't show losses. So where did they spend all of that cash?

persistentone said:

I read it backwards you are right. So they took down that much debt, and increased cash accordingly. But the balance sheet doesn't show increasing cash balances. Income statement also doesn't show losses. So where did they spend all of that cash?

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My guess is that it will show up in the buildup of inventories, particularly at the two January half year dates. That's the nature of this particular business.

oldblue said:

My guess is that it will show up in the buildup of inventories, particularly at the two January half year dates. That's the nature of this particular business.

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There it is; you are right. I see the inventory build, but I never see the inventory letting up. Given the macroeconomic situation, I wonder if we don't see a big write down of inventory at some point.

P.S., I'm an official Nufarm owner as of yesterday. While I calculate that Sinochem cannot afford much more than a $11 offer on typical financing terms, I have to remember that Sinochem is an ex government enterprise, so probably they can pull in some strings to get some extraordinary financing arrangement. Enough analysts published a $14 target bid that there must be merit to that number.

An article on Bloomberg says "Sinochem could offer between A$12 and A$15 a share for Nufarm, according to David Halliday, a trader at Macquarie Group Ltd." Frankly that's not a lot of upside to the investment, and if the negotiations collapse we are back to $9 quickly.

So $2 down and up to $5 up is not a great trade, but my secret hope is that the early press release gets us a competitive bid. With competition from a larger firm, I think we could get a $17 to $19 bid. At the same EBITDA multiple as the prior Chinese bid, we would be looking at a $21 bid. That's obviously not very likely to repeat, as it's just a different era now much less accepting of highly geared deals.

persistentone said:

There it is; you are right. I see the inventory build, but I never see the inventory letting up. Given the macroeconomic situation, I wonder if we don't see a big write down of inventory at some point.

P.S., I'm an official Nufarm owner as of yesterday. While I calculate that Sinochem cannot afford much more than a $11 offer on typical financing terms, I have to remember that Sinochem is an ex government enterprise, so probably they can pull in some strings to get some extraordinary financing arrangement. Enough analysts published a $14 target bid that there must be merit to that number.

An article on Bloomberg says "Sinochem could offer between A$12 and A$15 a share for Nufarm, according to David Halliday, a trader at Macquarie Group Ltd." Frankly that's not a lot of upside to the investment, and if the negotiations collapse we are back to $9 quickly.

So $2 down and up to $5 up is not a great trade, but my secret hope is that the early press release gets us a competitive bid. With competition from a larger firm, I think we could get a $17 to $19 bid. At the same EBITDA multiple as the prior Chinese bid, we would be looking at a $21 bid. That's obviously not very likely to repeat, as it's just a different era now much less accepting of highly geared deals.

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I got the exposure through NFNG. Upside is a bit over 20% at current price. I am hoping there is support around 75AUD mark if the deal didn't go through, and should still get dividend as long as the business is profitable.

cheeyeen said:

I got the exposure through NFNG. Upside is a bit over 20% at current price. I am hoping there is support around 75AUD mark if the deal didn't go through, and should still get dividend as long as the business is profitable.

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What is NFNG, and what is relationship to Nufarm? Does Nufarm have some kind of income security? What is the symbol for NFNG?

persistentone said:

What is NFNG, and what is relationship to Nufarm? Does Nufarm have some kind of income security? What is the symbol for NFNG?

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NFNG is the convertible note for Nufarm. (NFNG is the code). It has a face value of 100AUD and currently trading at 83AUD. From the prospectus Nufarm will redeem the note at face value if the company is being taken over. It is paying an interest of 6 months BBSW + 1.9% margin, due to step up in 2011. I got it a few weeks back after the profit warning, thought it is a less risky way of getting exposure to any takeover activity.

cheeyeen said:

NFNG is the convertible note for Nufarm. (NFNG is the code). It has a face value of 100AUD and currently trading at 83AUD. From the prospectus Nufarm will redeem the note at face value if the company is being taken over. It is paying an interest of 6 months BBSW + 1.9% margin, due to step up in 2011. I got it a few weeks back after the profit warning, thought it is a less risky way of getting exposure to any takeover activity.

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I am not able to pull up NFNG.AX on Reuters. Is it coded a different way?

What would be the best site to chart that one on?

I am a little confused by the terms for this one. I see them described as "7.48% Perpetual" online, but the 2008 annual report says NFNG is actually a floating rate?

cheeyeen said:

NFNG is the convertible note for Nufarm. (NFNG is the code). It has a face value of 100AUD and currently trading at 83AUD. From the prospectus Nufarm will redeem the note at face value if the company is being taken over. It is paying an interest of 6 months BBSW + 1.9% margin, due to step up in 2011. I got it a few weeks back after the profit warning, thought it is a less risky way of getting exposure to any takeover activity.

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I tried to edit my last message in place and the system timed me out. Dang.

I am confused by the reset in 2011. The 2008 annual report says that on 11/24/2011 they can EITHER "reset" OR "step up" the security.

Let's take step up. That would mean they must pay 1.9% + 7.48%? Since the instrument is described on some sites as "floating rate" it is not clear to me whether 7.48% is a hard number that would be stepped up.

Does the security have a perpetual step up feature, 1.9% every five years?

I'm more concerned by the "reset" option. What does that mean? Does that mean they get to look at rates on similar instruments and reset the base rate? They do state "reset" as an "OR" to "step up" so that implies it is an alternative to step up.

If they are paying a fixed rate 7.48%, at current prices they have an effective annual yield just under 10%. Is it right? They claim this is an unfranked dividend rather than interest payment? Why is that? As a non resident I'll have a higher withholding on the unfranked dividend, and it clearly is an interest payment conceptually?

What price did you get in at? It's certainly an interesting way to play this situation. I would like to see price come back to $76.

cheeyeen said:

NFNG is the convertible note for Nufarm. (NFNG is the code). It has a face value of 100AUD and currently trading at 83AUD. From the prospectus Nufarm will redeem the note at face value if the company is being taken over. It is paying an interest of 6 months BBSW + 1.9% margin, due to step up in 2011. I got it a few weeks back after the profit warning, thought it is a less risky way of getting exposure to any takeover activity.

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Where does one get a time graph of BBSW? I saw some indications that it has crashed recently. I guess the recent softening of NFNG's price might simply mirror the fact that BBSW itself is coming down?

They have the option to step up by 1.9%, but the language here is all to Nufarm's favor. If BBSW has crashed, then they "reset" NFNG to a low rate. If inflation takes off and bank paper is getting issued at 12%, then Nufarm simply ignores that and "steps up" to rate 1.9% higher than the prior rate, but still way below the market rate.

I dislike the fact that the board can simply decide to not pay a distribution, and the distribution does NOT accumulate and there is no obligation incurred to pay.

Really this thing looks pretty risky: you have the illiquidity of a bond with none of the protections for principal and no guarantees whatsoever of any coupon payment.

persistentone said:

I tried to edit my last message in place and the system timed me out. Dang.

I am confused by the reset in 2011. The 2008 annual report says that on 11/24/2011 they can EITHER "reset" OR "step up" the security.

Let's take step up. That would mean they must pay 1.9% + 7.48%? Since the instrument is described on some sites as "floating rate" it is not clear to me whether 7.48% is a hard number that would be stepped up.

Does the security have a perpetual step up feature, 1.9% every five years?

I'm more concerned by the "reset" option. What does that mean? Does that mean they get to look at rates on similar instruments and reset the base rate? They do state "reset" as an "OR" to "step up" so that implies it is an alternative to step up.

If they are paying a fixed rate 7.48%, at current prices they have an effective annual yield just under 10%. Is it right? They claim this is an unfranked dividend rather than interest payment? Why is that? As a non resident I'll have a higher withholding on the unfranked dividend, and it clearly is an interest payment conceptually?

What price did you get in at? It's certainly an interesting way to play this situation. I would like to see price come back to $76.

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The full details of the note is in the prospectus.
http://www.nufarm.com/Assets/3429/1/Nufarm_Prospectus.pdf

It said NUF has option to convert, step up, redeem, re-market, reset on a step up date. Current interest rate is a margin of 1.9% over the 6 months BBSR. If NUF chooses to let the rate to "step-up", then in 2011 the new margin will be 3.9% (Interest rate is 6 month BBSR + margin). I think it is only one time step up. Yes, I think they do have the option to reset to the "market rate" at that time. After all, they wouldn't want to pay more than the market rate. But the holder do have the option of whether to accept the new rate I think. Depends on the market condition at that time, a margin of 3.9% shouldn't be that bad (unless NUF's credit rating got downgrade again). I figure the price should probably be higher than 75AUD (I got at 75). As I said, I take it mainly as a less risky bet on the takeover action. If it doesn't eventuate, then the downside shouldn't be that bad and I would still get pay interest. If it happens, then I am out at 100AUD...

According to the prospectus, "NSS are perpetual, subordinated, unsecured, Redeemable, Exchangeable notes". I would think it is interest payment. But I can't be sure. You would have to ask them directly..

persistentone said:

Where does one get a time graph of BBSW? I saw some indications that it has crashed recently. I guess the recent softening of NFNG's price might simply mirror the fact that BBSW itself is coming down?

They have the option to step up by 1.9%, but the language here is all to Nufarm's favor. If BBSW has crashed, then they "reset" NFNG to a low rate. If inflation takes off and bank paper is getting issued at 12%, then Nufarm simply ignores that and "steps up" to rate 1.9% higher than the prior rate, but still way below the market rate.

I dislike the fact that the board can simply decide to not pay a distribution, and the distribution does NOT accumulate and there is no obligation incurred to pay.

Really this thing looks pretty risky: you have the illiquidity of a bond with none of the protections for principal and no guarantees whatsoever of any coupon payment.

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Persistentone, it looks like you are not very familiar with interest rate securities. BBSW is the interest rate at which Australian banks lend to each others (Europe and US use LIBOR mainly), it is usually following, and a bit higher than, the Reserve Bank Cash Rate. During the peak of the financial crisis it went much higher than the Cash Rate because bank no longer trust each others and require higher margin to lend to each others. I am not sure what do you mean by BBSW "has crashed recently". If you refer to the rate being down sharply, that is because the Reserve Bank has cut the interest rate from over 7% down to 3%. BBSW just follow that. The declining price of NFNG is more a reflection of investors require much higher margin for a BB rated note (the current margin of 1.9% is decided in 2006 where the credit market was much much more generous than now). Also most recently decline is probably because of the profit downgrade by NUF. They do have fair a bit of debt, and every profit downgrade increase the risk of them not paying interest. But the price is holding quite well compare to NUF.

When they said step-up or reset, it is referring to the margin. Remember the interest rate is express as "6 months BBSW plus the margin". If inflation takes off and the Cash Rate is now 12%, then you will get 12% (or a little higher) + 3.9% = near 16%. They do have an advantage to be able to choose to step up the margin to 3.9% if their credit rating gets downgrade badly in 2 years time where they would have to pay much higher than 3.9% margin to borrow from the market. If not and they choose to reset to market rate, by then I think there is an option to have it redeemed. I also fail to see the problem in accepting market rate at that time? I assume market rate means no matter where I go, I would get similar rate for similar risk profile. So if everyone agree that it is a fair rate, then I assume the share price will get near face value rather than a big discount as currently shown.

The board can choose not to pay interest, but I fail to see how it is more risky than the ordinary shares. If they don't pay interest for NFNG, they are not allowed to pay dividend for NUF. If NUF goes bankrupt, again NFNG is ranked higher than ordinary NUF shareholders. As I said, I use NFNG to bet that the Chinese might come back for an offer (I got it just after the profit downgrade). Illiquid, yes.. protection for principal and interest payment, definitely better than the ordinary shares. Unless you are talking about it is risky to bet on the takeover offer.. or you think NUF is not a good company.