Investment Thesis:
- Attractive market dynamics – growing population requiring hearing aids, improving health in EM providing more access to devices such as hearing aids and relatively underpenetrated market
- There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term sustainable growth of COH
- Market leading positions globally
- Direct-to-consumer marketing expected to fast track market growth
- Best in class R&D program (significant dollar amount) leading to continual development of new products and upgrades to existing suite of products
- New product launches driving continued demand in all segments
- Attractive exposure to growth in China, India and more recently Japan
- Solid balance sheet position
- Potential benefit from Australian tax incentive
- Subject to successful passage of legislation, the patent box tax regime for medical technology and biotechnology should encourage development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022
Key Risks:
- Product recall
- Sustained coronavirus outbreak which delays recommencement of hospital operations in China
- R&D program fails to deliver innovative products
- Increase in competitive pressures
- Change in government reimbursement policy
- Adverse movements in AUD/USD
- Emerging market does not recoup – significant downside to earnings
Key highlights:
- COH reported strong FY21 results, with earnings (underlying NPAT) up +54% to $237m and within guidance of $225-$245m, despite Covid-19 impacted surgery activity recovering to varied levels across both developed and emerging markets
- For FY22, it is expected to deliver net profit of $265‐285m, a 12‐20% increase on underlying net profit for FY21, based on a 74 cent AUD/USD
- Sales revenue is expected to benefit from market growth, with a continuing recovery in surgery rates across many countries more affected by Covid
- The management will continue their investment in market growth activities
- Capex is expected to be ~$70‐90m for FY22 and includes around $20m related to a major process transformation and IT systems upgrade, a program that is expected to be a $100‐120m investment over the next four to five years
- Effective tax rate is expected to decline to ~25% as a result of the introduction of changes to the R&D tax concession by the Australian government, with legislated changes to take effect from 1 July 2021
- The Board is committed to maintaining the dividend policy which targets a 70% payout of underlying net profit
- Record sales revenue of $1,493m, was up +10%, or +19% in constant currency (CC), driven by market share gains, market growth and rescheduled surgeries post Covid lockdowns
- Implant units climbed +15% to 36,456 (developed markets up ~20%; emerging markets up ~10%), compared to FY19, implant units increased +7%
- The Board declared final dividend of $1.40 which brings full year dividends to $2.55 per share, up +59% and equates payout ratio of 71% of underlying net profit, in line with COH’s 70% target payout
- COH’s balance sheet position remains strong with net cash of $564.6m at year-end, improving from $457m in FY20
Company Description:
Cochlear Ltd (COH) researches, develops and markets cochlear implant systems for hearing impaired people. COH’s hearing implant systems include Nucleus and Baha and are sold globally. COH has direct operations in 20 countries and 2,800 employees.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrialising markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer-service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical’s 16% investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.
Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16%. The resultant collaboration should boost the performance of both companies, given little product portfolio overlap.
Financial Strength
Nufarm’s balance sheet is in great shape. In early April 2020, the company received AUD 1.2 billion net sale proceeds from major shareholder Sumitomo, for the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia, and Chile. This significantly bolstered the finances at a very fortuitous time, coming mid coronavirus. Prior to this in January 2020, group net debt had stood at a whopping AUD 1.6 billion. Nufarm’s under-leveraged balance sheet remains a strength. Fiscal 2021 net operating cash flow rebounded strongly from negative AUD 398 million in the pcp to positive AUD 370 million. This reflects a focus on working capital management. It sees net debt down 40% to a modest AUD 173 million, leverage (ND/(ND+E)) of just 8% and net debt/EBITDA very comfortable at 0.5. Net working capital significantly improved post sale of the Latin American business and remains a focus with improved debtor collections, reduced inventory and foreign exchange translation.
Our AUD 7.00 fair value for no-moat crop protection company Nufarm. Underlying fiscal 2021 NPAT improved to positive AUD 61 million against an underlying loss of AUD 67 million in the pcp. NPAT in the fiscal second half was negligible at just AUD 0.7 million. On a full fiscal year basis, APAC revenue enjoyed a sharp turnaround, up 52% to AUD 858 million and segment EBITDA margin nearly doubled to 12.7%. Nufarm shares plunged 8.5% on the day of profit release, a strange response given an all-important strong cash flow performance. The fall may have been in reaction to a decline in salmon demand impacting sales of Omega-3 canola. But there is a long way to run on Omega-3, still in its infancy, and we are unconcerned.
Bulls Say’s
- Nufarm benefits from potential strength in soft commodities markets.
- Nufarm has well-established distribution platforms in most major global agricultural markets.
- Product and geographic diversification helps reduce earnings volatility.
Company Profile
Nufarm Limited is a global crop-protection company that develops, manufactures, and sells a range of crop-protection products, including herbicides, insecticides, and fungicides. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop-protection market. Nufarm operates along two business lines: crop protection and seed technologies.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.