Greg Hunt, Managing Director of Nufarm Ltd [ASX:NUF] has delivered a dagger to the heart of short sellers today.
Coming into the week, Nufarm was the most shorted stock on the ASX. 17.7% of all stock were held in short interest. That means nearly a fifth of all shareholders were banking on a bad full-year result this morning.
They will be regretting that decision now.
Nufarm is currently up 25.5% at time of writing. Granted it did peak as high as 37% at market open.
A stellar result, thanks to some masterful management and decisive direction.
After a grim net loss of $15.5 million last year, Nufarm has managed to rebound. Hunt has steered the pesticide maker back into the black with a tidy $38 million profit.
The positive bottom line was buoyed by improved sales, better margins, and (mostly) steady costs. However, the elephant in the room is still the $1.2 billion debt sitting on the company’s balance sheet.
While it has shrunk since last year, this debt is still formidable. It has been hanging precariously over Nufarm for far too long.
So, Greg Hunt decided to make a gamble. In conjunction with the results announced this morning, he had more news to share.
Nufarm is selling off its South American arm to Japanese firm, Sumitomo. Another pesticide company that has been linked with Nufarm in the past.
With an asking price of $1.18 billion, this sale could wipe away almost all of Nufarm’s debt. Relinquishing a hefty amount of future earnings for some much needed capital freedom.
And this is the real reason the share price has spiked today.
From one continent to another
No doubt this wasn’t an easy decision for Nufarm. The South American business accounted for nearly a third of all revenue.
Losing that cash flow will be impactful. However, it also gives Nufarm the ability to pursue growth in other regions.
Both Europe and North America are in the company’s sights. Markets that could offer more return, more reliable sales, and a chance for much more growth.
As Hunt put it:
‘This Transaction represents compelling value for Nufarm shareholders and will provide an opportunity to refocus on other parts of the business where we can generate higher margins and stronger cash flow.
‘The significant reinvestment we have made in our European, Nuseed and North American businesses in recent years, along with the next phase of transformation in our Australian business, is expected to deliver earnings growth and improved returns for shareholders in the coming years.’
This bold plan will likely dictate whether Nufarm has a future or not. That is if it goes ahead.
There are still a few more hurdles to clear before it’s officially a done deal. However, shareholders (other than the short sellers) should have no qualms in signing off on it.
It will take time though.
Who knows, this time next year we could be looking at a very different company. One that may not have nearly as much pessimism surrounding it. Perhaps it will even become a desirable ASX pick. Time will tell.
In the meantime though, we’ve got four ASX recommendations that you won’t want to miss out on. These are stocks that we believe are some of the best you can buy on the market right now. You can read all about them in our full report, for free, right here.
For Money Morning