AGROCHEMICALS : Seedlings: China urea is back, India trying to shift the balance, EU finalises removal of tariffs

Research evidence excerpt

AGROCHEMICALS : Seedlings: China urea is back, India trying to shift the balance, EU finalises removal of tariffs

Refinitiv

Investment case, valuation and risks

CF Industries (Neutral, Target Price USD140)

Investment case

CF Industries is a producer of nitrogen fertilisers including urea, ammonia, liquid

ammonium nitrate and ammonium nitrate. CF has benefited in recent years from

elevated European gas prices and a steep global nitrogen cost curve. We see risks to

nitrogen margins in the mid-term from forward curve implied normalisation of EU-US

gas spreads. However, the Iran conflict and damage to LNG facilities may prolong the

higher spreads. Factoring this in we think the shares are fairly valued.

Valuation methodology

Our $140 TP is derived from our 3-stage DCF (available upon request), using 0.25%

terminal growth, a discount to our global assumption for nitrogen fertilizer assets of 0.5%

to account for lower US growth potential; 20% NOPAT margin which is broadly

consistent with the prior cycle; and our standard fertilizer WACC used across the sector

of 8.5%.

Risks

To the upside:

Supply outages in the global nitrogen fertiliser industry could be a positive risk for pricing.

Slower than expected supply additions could help urea prices. CFI has the majority of its

production in North America; lower Henry Hub gas prices are an upside risk for margins.

Higher than anticipated US corn prices are also a positive.

To the downside:

Lower than expected soft commodity prices could adversely impact fertiliser demand.

Adverse weather may also have the same impact. Faster than expected supply additions

could be an issue along with higher natural gas costs.

Nutrien (Neutral, Target Price USD80)

Nutrien is the largest, most liquid fertilizer producer and has exposure to all three