Yara share price rallies as Q3 results beat analyst expectations

LONDON (ICIS)–A plunge in third-quarter net income for Yara failed to deter a rally in its share price on Friday, as analysts noted that the year-on-year fall in earnings for the Norway-based fertilizer producer was not as bad as the market had feared.

The Norwegian business reported an adjusted earnings per share (EPS) of Norwegian kroner (NKr) 3.46 ($0.42), excluding currency and special items, alongside a net income drop of 79.5% year on year to NKr820m in the third quarter.

According to research and brokerage firm Bernstein, which now rates Yara Market Perform at a NKr220 target price, Yara’s third-quarter earnings per share stands 60% above its own estimate of NKr2.17 and 16% above consensus’ estimate of NKr2.99.

The news buoyed Yara’s share price in Friday trading, with stock changing hands for NKr284.70 apiece as of 13:08 GMT, a 3.9% increase on the company’s closing price on Thursday.

“Yara reports a weaker result than a year earlier, reflecting supply-driven prices for fertilizer globally.

“But although production margins were significantly lower, our Crop Nutrition and Industrial earnings were broadly stable, demonstrating the strength and resilience of Yara’s integrated business model,” said Yara President and CEO Svein Tore Holsether.

The fertilizers market has suffered from poor harvests, lower grain prices and oversupply issues while ammonia and urea producers globally have suffered from a downturn in prices.

Average urea and nitrate prices declined 25% year on year for the producer during the quarter were where Yara, while prices for compound NPK (nitrogen, potash, phosphates) were softened by an increase in premiums, leading a smaller drop in average realised prices of 15% over the same period.

“Chinese urea production and export costs continue to be the main reference point for global nitrogen pricing, but ongoing urea capacity increases in the US and North Africa are partially displacing Chinese urea exports, leading to structurally lower prices in most locations compared with Chinese prices.

“FOB [free on board] prices around $200 per tonne appear to represent a break-even level for high-cost Chinese producers,” said Yara management, quoted in a Bernstein analyst note.

Yara remains upbeat on the longer-term outlook, due to overall higher supportive fertilizer application than a year ago as well as improved pre-buying incentives in Europe in spite of lower nitrogen prices and premiums.

The company also noted improved fertilizer demand from Brazil, where deliveries were 11% higher year on year in the third quarter. Around two-thirds of Brazilian demand growth related to higher volumes in premium products such as nitrogen phosphorus potassium (NPK).

NPK sales volumes for the company amounted to 3.2m tonnes in the third quarter 2016, compared to 2.7m tonnes the year before, while fertilizer producers association Anda said on 13 October 2016 that general fertilizer deliveries to Brazilian farmers rose 5.9% year on year in September.

Yara said: “In Brazil, fourth-quarter industry deliveries are expected to be broadly in line with a year earlier, but Yara sees continued growth longer term.”

The fertilizer company is expanding its business, which Bernstein believes will generate approximately NKr5 per share of incremental earnings by 2020 when fully operational.

In an attempt to target over-supply in the industry, Yara announced on 21 July 2016 that they were launching the Yara Improvement Program which aimed to reduce cost and increase efficiency.

“Parts of the program have entered the implementation phase, and we are confident we will deliver at least $500m of annual EBITDA improvement by 2020,” said Holsether, with Bernstein expecting full details on the programme at the full year 2016 results.

($1 = NKr8.19)

Additional reporting by Nurluqman Suratman

(updates throughout, adds analyst, company comment, Brazil fertilizer statistics)