Scotia analysts see lower earnings for Viterra

(Resource News International) — While 2009 will be another strong year earnings-wise for Viterra, it will not be quite as good for Canada’s largest grain company as 2008 was, according to a new Scotia Capital equity report.

Total earnings (EBITDA) for fiscal year 2009 were pegged by Scotia Capital on Jan. 9 at $393 million, below estimated 2008 earnings of $494 million but in line with 2007 (pro forma) earnings of $393 million.

The report says Scotia Capital downgraded Viterra’s one-year price target to $12.75 from $13.75. The estimated earnings per share for fiscal year 2009, meanwhile, were lowered to 77 cents from the previous estimate of 82 cents.

Already by the fourth quarter of fiscal 2008, the previously “heady market conditions” that had prevailed in agricultural markets last year were slowing, the report says.

Looking forward to 2009, Scotia Capital predicts reduced profitability from Viterra’s agri-products business due to lower fertilizer prices and farmer purchase deferrals.

Prices for nitrogen fertilizer, the main fertilizer Viterra retails, have fallen dramatically in just the last six months. According to the report, ammonia prices (Gulf Coast, FOB New Orleans, barge) heading into January 2009 were roughly US$110 a tonne, down from fall 2008 levels of US$700 to US$850 a tonne.

The price for a tonne of urea (Gulf Coast, FOB New Orleans, granular) has similarly crashed from roughly US$820 a tonne in July 2008 to just over US$200 a tonne heading into January.

But despite lower fertilizer prices, Scotia Capital says Viterra’s 2009 outlook remains “generally favourable” due to the strong outlook for grain handling profits. The report notes western Canadian output of the six major grains for crop year 2008-09 was 16 per cent higher than the historical average and that crops were above-average in quality.

“While the F2009 outlook appears somewhat challenging for the agri-products segment, the grain handling segment looks to be on track for another above average year, although down compared with F2008,” the report states.

Viterra’s fourth quarter earnings report for fiscal year 2008 will be released after market on Tuesday. Scotia Capital expects the report to include an update on acquisition opportunities.

“We understand that (Viterra’s) areas of interest from (a mergers and acquisitions) perspective include grain and processing, geographic expansion and fertilizer manufacturing. We believe the U.S. and Australia are the geographies of greatest interest,” the report states.

CIBC downgrades

Viterra’s outlook was already downgraded last month by CIBC World Markets in an equity research report for the chemical and fertilizer sectors entitled “Deterioration in Demand Worsens – Lowering Estimates For Chemicals and Fertilizers.”

In the report, CIBC World Markets lowered its 12-18 month price target for Viterra from $9.50 to $7.

Going forward, key risks to the existing price target include weather, commodity prices, foreign exchange, integration of Agricore United (which Saskatchewan Wheat Pool took over in 2007 to form Viterra) and credit, the report stated.

Also significant was CIBC World Markets’ decision to lower the company’s stock rating from “SP” to “SU.”

Whereas Viterra stocks were previously expected to perform in line with the sector during the next 12-18 months (SP), they are now expected to underperform the sector during the same period (SU), according to the report’s stock rating system.

The report’s 12-18 month outlook for the fertilizer sector said that while the “worst case scenario” of an extended global economic downturn had developed, an extended buyers strike on fertilizer is unlikely given the “dire consequences of underapplying fertilizer on grain yields longer-term.”

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