• Q3 revenue was down 66% YoY, and 15% lower than our estimate, due to lower product sales (down 43% YoY), and prices (down 40% YoY). Consequently, both EBITDA, and EPS turned negative. Fertilizer demand declined in the first nine months of this year, influenced by sluggish global GDP growth, elevated interest rates, and volatile fertilizer prices.
  •  On a positive note, fertilizer prices have begun stabilizing, which we believe should encourage increased consumption among farmers. Potash prices (Brazil) are down 45% YoY, but up 5% QoQ, to $343/t vs the five-year average of US$360/t. We are cautiously optimistic, and anticipate a recovery in demand in 2024.
  • Since August 2003, the Central Bank of Brazil has made three consecutive rate cuts which should result in increased spending by farmers.
  • As Q3 was weaker than expected, we are lowering our 2023/2024 production, and EPS forecasts. Given NPK's balance sheet, and our free cash flow estimates, we believe the company can fund its operations without external capital.

 

 

NPK vs Major Fertilizer Producers

NPK has higher gross margins

 

We anticipate NPK’s revenues will decline 47% YoY this year vs an average of 31% for the majors listed here (Source: S&P Capital IQ).

 

Operating Performance and Financials

Q3 revenue was down 66% YoY, and 15% lower than our forecast, due to lower sales and product prices.

Gross margins declined 11 pp to 67% vs our forecast of 78%, due to lower product prices

 

As a result, EBITDA, and EPS turned negative

Operating profit/tonne declined YoY, from $43/t to ($6)

 

FCF was down as well

Strong working capital position

 

Debt to capital remains higher than the sector average

 

Subsequent to Q3, NPK refinanced its debt at lower interest rates; since August 2023, the Central Bank of Brazil has reduced its benchmark rates three times.

 

FRC Projections

As Q3 was weaker than expected, we are lowering our 2023/2024 production, and EPS forecasts

 

We are not making any material changes to our long-term forecasts

We are reiterating our BUY rating, and adjusting our fair value estimate from $9.96 to $8.26/share. As fertilizer prices have started stabilizing, we anticipate a recovery in potash demand in 2024. Key catalysts for the stock include upcoming field study results, and potential for positive developments regarding carbon credit sales.

Our DCF valuation decreased from $9.96 to $8.26/share, due to our lower near-term EBITDA forecasts

We are continuing to refrain from using a comparables valuation model as we have yet to identify junior producers with comparable growth potential

 

Risks

  • The value of the company is dependent on fertilizer prices
  • Geopolitical and FOREX
  • No guarantee that the company’s brands will gain mass adoption
  • Global fertilizer demand
  • Leveraged balance sheet
  • Permitting and development

Maintaining our risk rating of 4 (Speculative)

 

APPENDIX