NUF - Nufarm Limited

[persistentone]

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.

Remember I am not Australian, so BBSW isn't a familiar entity to me.

My question is where can I go to see a time graph of BBSW?

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.

If the dividend paid swings wildly based on BBSW, don't you think NFNG is going to reflect those swings as well? BBSW was above 7% for a while and now comes down to around 3%. That's a major change in the dividend paid. Why shouldn't the security reflect that?

I agree credit rating affects price too, but typically those are gradual changes. Going from a 7% to 3% change on BBSW in a few months is huge.

As for price, in the last year the NUF stock went from $17 to $9, about 45% down. In a similar timeframe NFNG was down 35%, so a little safer yes but not much, and you do cap your upside.

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%.

Until I read prospectus I didn't realize it was resetting every six months, so sorry about that.

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.

I'm really not clear at this point on what the "reset" option entails. In the case of reset do they still have to markup by 1.9%? Since as you point out they are in effect resetting the base rate every six months anyway, why even have a "reset" option? It sounds like a trick.

The board can choose not to pay interest, but I fail to see how it is more risky than the ordinary shares.

They are apparently paying an unfranked dividend and not interest. I was saying it is more risky than a *bond*. The problem is you have the reward profile of a bond (gain capped at $1) but the risk profile of a stock (unlimited loss, no accumulation of interest, perpetual risk of capital never being returned, and very poor credit hierarchy protections).

If they don't pay interest for NFNG, they are not allowed to pay dividend for NUF.

That's right, but that's not as strong as it sounds. With most income securities, the dividend on the stock stops *until the preferred or income security has all of its dividends paid in arrears in full*. With NFNG, it says very clearly that the board can simply say "We don't feel like paying you anything this time." and they owe you nothing. Next six months and everything is reset like nothing happened. As an investor, what did I get in exchange for that? I cap my upside to $1, and I have a very similar risk to the primary shareholders for dividends.

If NUF goes bankrupt, again NFNG is ranked higher than ordinary NUF shareholders.

Given the debt level, that doesn't give me any comfort. NFNG probably sees no recovery in an Administration.

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.

As a short-term one to 12 month trading play on a Chinese takeover of Nufarm, it's interesting.

 

[cheeyeen]

Remember I am not Australian, so BBSW isn't a familiar entity to me.

My question is where can I go to see a time graph of BBSW?

You can probably do a google search to find out. I don't have one myself. I roughly know what the rate is following the Australia Reserve Bank cash rate.

If the dividend paid swings wildly based on BBSW, don't you think NFNG is going to reflect those swings as well? BBSW was above 7% for a while and now comes down to around 3%. That's a major change in the dividend paid. Why shouldn't the security reflect that?

It does. Since it is an interest rate security, the interest rate will have an effect on its price. So does the credit rating, date to maturity, whether it is secured or in-secured etc.

I agree credit rating affects price too, but typically those are gradual changes. Going from a 7% to 3% change on BBSW in a few months is huge.

I probably won't argue with you about the magnitude of change in Cash Rate to the price of a floating rate security. But you can take a look at a credit rating downgrade by a rating agency to a corporate note/bond and see what is the effect of that on the price of that bond/note.

As for price, in the last year the NUF stock went from $17 to $9, about 45% down. In a similar timeframe NFNG was down 35%, so a little safer yes but not much, and you do cap your upside.

You have taken this out of context. I said I bought this as a bet on the Chinese takeover after the profit downgrade. When I evaluating the trade, price of NUF is at 10.50, and NFNG at 75AUD. There were two analysts report downgrading NUF's result even more than the management, saying there are more downsides due to the price of materials (which turn out to be correct).
If a takeover offer comes, I don't think they will go higher than 15AUD (the last offer was 17AUD) so it could be a 43% gain. For NFNG the gain would be 25AUD/75AUD = 33.3% gain. So in my analysis, the upside is not much more. I don't know whether the takeover offer will come or not, or at what price (remember it is a bet).

For the downside, again I don't know how far the share price can go down if the offer didn't come, and there is another profit downgrade. I do notice that the market is not very forgiving for two subsequent profit downgrades. For NFNG, as long as NUF is profitable (even there is profit downgrade, it is still making a profit) then it most likely will pay distribution. Checking the dividends history of NUF, it has been paying dividends for the last 8-9 years. So I think NFNG's distribution is not that much at risk. For the yield, NFNG is yielding around 6.5% at price of 75AUD. And the sentiment is that interest rate is not going any lower (or at most 0.25% lower). There is even talks that it is going to rise so the yield can only be improved. So I figure the downside should be limited (unless the company is being downgraded, which then I doubt the price of NUF would do much better than NFNG).

I'm really not clear at this point on what the "reset" option entails. In the case of reset do they still have to markup by 1.9%? Since as you point out they are in effect resetting the base rate every six months anyway, why even have a "reset" option? It sounds like a trick.

Again, "Reset" in the prospectus is referring to the margin. They don't control the BBSW so they can't "reset" the base rate.

They are apparently paying an unfranked dividend and not interest. I was saying it is more risky than a *bond*. The problem is you have the reward profile of a bond (gain capped at $1) but the risk profile of a stock (unlimited loss, no accumulation of interest, perpetual risk of capital never being returned, and very poor credit hierarchy protections).

Unlimited loss?? I wouldn't loss more than what I put in. Would there be any different if I hold NUF when it goes bankrupt? Don't take this out of context.. I am using this to bet on takeover offer for NUF.

That's right, but that's not as strong as it sounds. With most income securities, the dividend on the stock stops *until the preferred or income security has all of its dividends paid in arrears in full*. With NFNG, it says very clearly that the board can simply say "We don't feel like paying you anything this time." and they owe you nothing. Next six months and everything is reset like nothing happened. As an investor, what did I get in exchange for that? I cap my upside to $1, and I have a very similar risk to the primary shareholders for dividends.

Again, base on my view. The upside is 33% vs 43%. (I could be totally wrong and there could be 3-4 people coming and bid it to over 20AUD. But the problem is, no one know.. Otherwise I don't even need to evaluate). So doesn't matter where the price cap is, the return should be evaluate on % return, not in dollar terms. They have to stop paying NUF holder before the stop paying NFNG. So in a bad scenario, I would be better off with NFNG than NUF. It is a balance of risk and reward approach that I am taking

Given the debt level, that doesn't give me any comfort. NFNG probably sees no recovery in an Administration.

As a short-term one to 12 month trading play on a Chinese takeover of Nufarm, it's interesting.

So it has negative equity? I think the Chinese will take them out if they are in big trouble. That's why the bet..

 

[persistentone]

I understand the reasons to possibly prefer NFNG to NUF as a short term trade on the Sinochem takeover. I was simply pointing out as a stand alone investment to hold for a longer time period it wasn't thrilling me.

 

[persistentone]

A very small and poorly detailed graph of the 90 day BBSW can be found in the bottom left hand corner of this site:

https://www.termdeposit.com/

You will notice that the crash in BBSW rates from September through December 2008 seems to very closely match the movement of NFNG in this period. What is interesting to me is why NFNG started to recover in April from low 60s to low 70s.

The reaction of NFNG to the Sinochem announcements is clear.

 

[cheeyeen]

A very small and poorly detailed graph of the 90 day BBSW can be found in the bottom left hand corner of this site:

https://www.termdeposit.com/

You will notice that the crash in BBSW rates from September through December 2008 seems to very closely match the movement of NFNG in this period. What is interesting to me is why NFNG started to recover in April from low 60s to low 70s.

The reaction of NFNG to the Sinochem announcements is clear.

The market sentiment has improved. People are willing to lend the money at a lower risk premium for interest securities. Check the price for a few of the hybrids and u should see similar pattern. ORIPB, RHCPA, SEVPC etc.

 

[persistentone]

Did anyone notice this obscure press article when the Nufarm deal was announced:

"SYDNEY, Sept 28 (Reuters) - Australian farm chemicals group Nufarm Ltd (NUF.AX), subject to $2.5 billion takeover offer from Sinochem, said it has not spoken to any counter bidders about the takeover, the company told an analyst briefing on Monday."

What an odd thing to say. Notice the announcement does NOT say that no other bids were received. Rather, what the announcement appears to suggest but not say explicitly is that other bids *were* received, but that they were never considered because of the exclusivity arrangement.

What do others make of this?

 

[oldblue]

I think the "agreement" allows NUF to receive other approaches, just not to solicit them.

I'd be surprised if anyone else overbids Sinochem but it looks like we'll have a long wait before this is finalised, one way or another.

http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=03BC28D7-1871-E587-E151A5D923ABB92A

 

[persistentone]

I think the "agreement" allows NUF to receive other approaches, just not to solicit them.

I'd be surprised if anyone else overbids Sinochem but it looks like we'll have a long wait before this is finalised, one way or another.

The point is the press release seems to suggest another bid WAS received already, and they simply did not reply to it.

http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=03BC28D7-1871-E587-E151A5D923ABB92A

If the stock trades to $11, and the deal closes at $13 in March, that is a 30%+ return on investment. I would have to think about piling in more money if it trades down to that level.

 

[skc]

Did anyone notice this obscure press article when the Nufarm deal was announced:

"SYDNEY, Sept 28 (Reuters) - Australian farm chemicals group Nufarm Ltd (NUF.AX), subject to $2.5 billion takeover offer from Sinochem, said it has not spoken to any counter bidders about the takeover, the company told an analyst briefing on Monday."

What an odd thing to say. Notice the announcement does NOT say that no other bids were received. Rather, what the announcement appears to suggest but not say explicitly is that other bids *were* received, but that they were never considered because of the exclusivity arrangement.

What do others make of this?

You have to know the context of that statement. On it's own it meant nothing to me. To me the way the response was phrased is simply to hold their cards close - it doesn't want to deny or acknowledge the existence of any counter bidders. And if anything that actually meant there hasn't been any counter bidders.

In takeover situations, don't companies have obligation to inform shareholders if a counter bid emerges? And as pointed out already, agreement is not exclusive.

 

[persistentone]

You have to know the context of that statement. On it's own it meant nothing to me. To me the way the response was phrased is simply to hold their cards close - it doesn't want to deny or acknowledge the existence of any counter bidders. And if anything that actually meant there hasn't been any counter bidders.

Then it is just a poorly worded release. A clear communication would be "No other bid has been received." Trying to create an ambiguity about an important detail for which they would be obligated to release information to both the market and Sinochem only creates confusion. A release that says "No responses to any possible bids received" looks just bizarre.

In takeover situations, don't companies have obligation to inform shareholders if a counter bid emerges? And as pointed out already, agreement is not exclusive.

The Heads of Agreement term sheet uses the word "Exclusive" throughout. I could not find "non-exclusive" anywhere except in reference to an obscure legal jurisdiction point.

 

[skc]

The Heads of Agreement term sheet uses the word "Exclusive" throughout. I could not find "non-exclusive" anywhere except in reference to an obscure legal jurisdiction point.

My bad choice of word... definitely exclusive through the exclusivity period. But non-binding and doesn't stop others having a tilt.

From a trading point of view... it's not a bad risk reward at current prices. Upside target $13.15 (including 15c dividend I believe) i.e. $1.8, downside risk probably ~$10 i.e. $1.35. Further potential from counter bids, but downside risk from FIRB and failed due diligence. Positive expectancy if one thinks about it as a 50/50...

Discl. I hold

 

[oldblue]

A lot of water under the bridge since the last post!

Sumitoto board has approved the stategic investment in Nufarm. To buy 20% of existing shares at $14. Cash issue at $14 to follow, subject to approval by NUF shareholders.

http://news.smh.com.au/breaking-new...d-clears-nufarm-investment-20100122-mq9w.html

 

[persistentone]

A lot of water under the bridge since the last post!

Sumitoto board has approved the stategic investment in Nufarm. To buy 20% of existing shares at $14. Cash issue at $14 to follow, subject to approval by NUF shareholders.

http://news.smh.com.au/breaking-new...d-clears-nufarm-investment-20100122-mq9w.html

Does anyone here know the terms of the tender offer, and will they make that available to US investors? Usually they do not.

 

[oldblue]

The original announcement appeared to exclude US holders.

http://www.asx.com.au/asxpdf/20091229/pdf/31mzgd82k33j53.pdf

 

[oldblue]

A lot of water under the bridge since the last post!

Sumitoto board has approved the stategic investment in Nufarm. To buy 20% of existing shares at $14. Cash issue at $14 to follow, subject to approval by NUF shareholders.

http://news.smh.com.au/breaking-new...d-clears-nufarm-investment-20100122-mq9w.html

Correction.

The price for the cash issue has yet to be set. One would expect that it would be at a discount to $14!

 

[Taltan]

So what's going on here??? Sumitoto are buying for $14 yet Mr Market does not think its worth $8.70 anymore. I understand results were dissappointing but stock is still falling a month later. $14 compared to $8.70 is a massive divergence for control never mind 20%

 

[oldblue]

So what's going on here??? Sumitoto are buying for $14 yet Mr Market does not think its worth $8.70 anymore. I understand results were dissappointing but stock is still falling a month later. $14 compared to $8.70 is a massive divergence for control never mind 20%

The $14 is now irrelevant. That price was set several months ago and Sumitomo are committed to buying 20% of the company at that price.

Attention now focuses on the upcoming cash issue and clearly investors aren't prepared to overpay given the current poor profitability of the company. Is that a cyclical problem? Time will tell!

 

[oldblue]

And today's announcement predicting a full year's profit of (only) $80m to $100m won't have helped!

http://www.smh.com.au/business/nufarm-predicts-profit-up-to-100m-20100329-r8bl.html

 

[jancha]

Why would Hartley have a recommended buy on NUF when the markets showing otherwise and any thoughts from chartist regarding NUF?

 

[oldblue]

Why would Hartley have a recommended buy on NUF when the markets showing otherwise and any thoughts from chartist regarding NUF?

Probably because they consider it undervalued at the current shareprice compared to their own valuation.

On the other hand, the market is still waiting to see the terms and price of the forthcoming cash issue and reluctant to bid up the SP meanwhile.