Agrium Inc (AGU)
Okay Quarter, Despite Outage; Cautious Guidance
7 November 2011 ¦ 12 pages
ir.citi.com
Generally Okay 3Q Impacted by Nitrogen Outages – 3Q EPS of $1.85 was ahead of
our estimate despite the impact of an unplanned outage at one of AGU’s nitrogen
plants. We thought the tone of commentary on the earnings call was less bullish than
some fertilizer peers, as AGU highlighted that 1Q’12 farmer commitments were below
normal as farmers may delay purchases due to volatile macroeconomic conditions.
This uncertainty has manifested in a wide $1.80-$2.30 4Q guidance range. We think
management is being somewhat cautious (recall the lower than expected guidance for
2Q, which was subsequently raised in mid-June), and we continue to expect a strong
fall fertilizer application season, similar to 2010
Wholesale Operational Challenges a Headwind – Both planned and unplanned
outages during the quarter negatively impacted the wholesale nitrogen segment, and
volumes were ~17% below our estimate and fell 14% Y/Y (compared to a 2% Y/Y
increase in nitrogen volumes for CF and basically flat volumes for POT). An unplanned
outage at the company’s Carseland plant (~18% of AGU’s North America capacity)
resulted in ~100k metric tons of lost ammonia production. However, AGU’s plants are
back online, and we expect 4Q volumes to increase ~4% Y/Y thanks to strong
international production. Like its peers, AGU is investigating brownfield expansions at
its North America facilities to take advantage of low-cost natural gas, and we expect the
company to provide additional detail regarding potential projects in 1H’12.
Retail a Steady Contributor; Landmark Integration Proceeding Slowly – AGU’s
retail operations continue to benefit from higher pricing, volumes, and acquisitions, with
gross profit increasing ~56% Y/Y. However, gross margins of 24.8% declined 80 bps
Y/Y, likely due to the impact of Landmark. Indeed, AGU management acknowledged
that while retail conditions in Australia have improved significantly since the major
drought in the country broke last year, it is 6-12 months behind in achieving its synergy
targets. Successful “tuck-in” acquisitions in North America may be able to partially
offset this, and AGU is on pace to acquire 26 new stores in 2011 which could add
$200mm in revenue next year.
Lifting Estimates; TP to $86 – We lift EPS estimates for 4Q and 2012-13, due
primarily to higher gross profits in Retail. Remain Neutral; our Top Pick in Ag is POT. |
