Though the catalysts for long-term growth of the global agricultural sector are readily appreciated (global population growth, changing dietary patterns in emerging markets and environmental degradation), the number of home-grown options open to UK investors have been limited. As a result, we have previously highlighted the merits of Zurich-traded Syngenta AG (SIX:SYNN), one of our preferred plays within the sector, but shares in the crop protection and seed breeding giant have always been strongly supported at the institutional level, so it hasn't always been easy for retail investors to secure an attractive entry point. However, we think that such an opportunity has just arisen because expectations for Syngenta's full-year earnings have had to be reined in due to "a lower than expected currency benefit", together with a write-down on the value of its corn seed inventory due to the promise of a bumper US crop.
- Strong Latin American performance
- Market leader in crop protection
- Structural growth markets
- High cash margins
- Inventory write-down
- Soft commodities/grains down
JPMorgan believes that "the inventory write-down will likely overhang the shares until early 2014", but delays to the Brazilian registration process on the group's Solatenol fungicide product have also weighed on market sentiment. In May, Syngenta and DuPont signed a chemistry licensing agreement which gives DuPont access to Solatenol for certain mixtures in Brazil, in exchange for access to the active ingredient oxathiapiprolin which offers Syngenta a different mode of action for disease control across a range of crops. Syngenta has been hoping to expedite this process as it has been losing out to regional competitors in the fungicide market - a problem given that Brazil is one of its most important drivers of growth. Indeed, the success of Syngenta's product roll-out across the Brazilian market can by gauged by the fact that Latin America now accounts for 28 per cent of group sales after generating a compound annual growth rate of 19 per cent since 2007. (Third-quarter growth stood at 17 per cent on a constant currency basis).
| SYNGENTA (SYNN) | ||||
|---|---|---|---|---|
| ORD PRICE: | CHF 347 | MARKET VALUE: | CHF 32.3bn | |
| TOUCH: | CHF 347-348 | 12-MONTHHIGH: | CHF 416 | LOW: CHF 343 |
| DIVIDEND YIELD: | 3.3% | PE RATIO: | 18 | |
| NET ASSET VALUE: | $97* | NET DEBT: | 33% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn)** | Earnings per share ($)** | Dividend per share (CHF) |
|---|---|---|---|---|
| 2010 | 11.6 | 1.68 | 15.1 | 7.0 |
| 2011 | 13.3 | 1.90 | 17.4 | 8.0 |
| 2012 | 14.2 | 2.15 | 20.4 | 9.5 |
| 2013** | 14.6 | 2.14 | 19.1 | 10.5 |
| 2014** | 15.5 | 2.47 | 21.9 | 11.5 |
| % change | +6 | +15 | +15 | +10 |
Matched bargain trading Beta: 0.70 £1 = 1.46 CHF (Swiss francs) *Includes intangible assets of $3.4bn, or $36.17 a share **Liberum Capital estimates, underlying PTP and EPS figures | ||||
Perhaps the resilience of Syngenta's shares is aptly demonstrated by the fact that, in sterling terms, they have only declined by 5.2 per cent year-on-year, despite the negative beat provided by October's third-quarter inventory update - although they are down by around a fifth relative to the Swiss Market Index (SMI). Nevertheless, the full-year outlook has trailed away since the second quarter, as expectations for the crop price environment faltered. Theoretically, at least, looming over-supply and rising input costs for a range of key grains and soft commodities on global markets could translate into reduced farming budgets through 2014, although this hasn't always panned out in the past.
Despite the likely write-down on its corn seed inventory, Syngenta still bumped up third-quarter sales by 11 per cent on a constant currency basis, and the group remains on track to deliver on its target of $25bn in sales of its eight key crops by 2020. Syngenta also expects improved profitability next year, while maintaining its target for a cash profits margin in the range of 22 to 24 per cent in 2015 - forward prospects remain solid. Despite a step-up over the past decade, the under utilisation of both mechanisation and the use of advanced crop protection and seed technologies across the global farming industry presents tremendous growth opportunities for the likes of Syngenta over the long run.
