Yara’s need of cash flow to keep capex weighs down shares: UBS

17 February 2014 10:54 Source:ICIS News

Yara LONDON (ICIS)--Investment bank UBS downgraded Norway fertilizer producer Yara from ‘buy’ to 'neutral' and lowered its 12-month share price target from Norwegian kroner (NKr) 316 to NKr250 (€30), it said on Monday.

Yara’s shares closed on 14 February at NKr246.20.

UBS expects Yara to increase its capital expenditure (capex) due to maintenance at its plants and the company will need significant cash flow to support it, adding pressure to operating expenses as personnel at the facilities will also be increased, the bank said.

“While we believe the specialty fertilizer growth strategy to be probably the most forward looking and value generative initiative coming out of any fertilizer multinational, upfront cash outflow and investment risks and an unexpected rise in maintenance capex makes us more cautious,” said UBS.

The bank has also lowered its earnings per share forecast for the next 12 months between 25-30% and expects cash flow return on investment (CFROI) to fall from 17% to 12.8%.

UBS also expects equity cash flow to fall from the 11% seen in 2013 to an average of 7.5% over the 2014-2018 period and the dividend yield falling to an average of 2.7%.

The bank said Yara is just starting to build a distribution platform to meet demand for industrialised food in emerging markets which is bringing growth in cash crop production in Brazil, and expects east and central Africa to benefit from the same trend within 10 years.

“But as we have seen with Syngenta, upfront investment costs are high and earning accretion takes time. Syngenta is well advanced in its implementation. Yara is just starting, and we take a rain-check on our Yara call until we see the strategy delivering earnings accretion,” the bank concludes.

Yara reported disappointing fourth quarter 2013 results on 12 February with net income at NKr59m from NKr2.15bn for the same period a year earlier on the back of weak margins for commodity fertilizers.  

(€1 = NKr8.3)

By Jonathan Lopez