Wednesday, 24 June 2015

Monsanto results: Syngenta chat and reiteration of the strong agricultural theme

The last time I wrote about Monsanto it was to muse about what to do with my large holding in Syngenta to which they had made a merger/takeover approach (link here).  Today's Monsanto conference call inevitably was quite a bit about Syngenta too.

Before we get to that a quick review of the results.  As I have discussed a number of times (see for example here) the seeds/crop protection space is one I thematically really like. So no surprises that Monsanto used this chart in their presentation deck: effectively a one-stop shop guide to why the space is structurally interesting.

In terms of the tactical numbers however they were not the strongest. Certainly they reiterated the previous numbers (low end to original guided numbers at the start of their fiscal year) but some of the comments were not exceptional, for example:
  • Sequential guidance: corn down due to lower Latam production, soybeans a little weaker due to lower US production
  • But offset by discretionary spend, lower generic impact, prices good  and ‘tax rate continues to migrate later’ – all of this suggests slightly poor (due to high % Latam exposure) for Syngenta Q2 numbers
  • Environment – ‘as we look into ’16 we think it looks like ’15…the prudent thing to do is plan accordingly’ i.e. looking to make further cost cuts
  • Possible to grow corn gross profit next year? – acres weak in Latam but believe price basis ‘may be tighter’ however corn balanced by beans and got generally good innovation so corn ‘mix lift’.  Will be clearer on overall ’16 impact in due course (probably in 3 months I would guess at their Q4/FY results).

So whilst Monsanto's management may say that ‘our business…is as strong as it has ever been’ they also acknowledged the need for a ‘new vision and new approach’...which brings us nicely to the Syngenta approach.

I really would like to be a fly on the wall of some of the Syngenta board meetings discussing the CHF449 a share approach as Monsanto paint a most interesting picture:
  • ‘singularly unsuccessful in getting Syngenta to talk’ (to Monsanto over the table)
  • ‘got a feeling we have not been around the first lap in these Syngenta discussions…mounting puzzlement why they won’t sit down’.
  • Get aggressive with Syngenta? – long way to go before then, more important to talk first: ‘continued outreach to their shareholders and to Syngenta…encourage them to sit down and do it face to face’.  ‘Preference would be a friendly deal with the chairman of these two companies’

Monsanto also offered some excellent insights into why they are interested in Syngenta - as it would allow the fusion of seed, crop protection and digital as noted by this chart: 

They implied that whilst Syngenta have skills in crop protection, little in latter (true).  They also said that Syngenta overstated the integration risk of this concept.  

The above concept is not a huge surprise to me and makes some basic sense...the trouble is for Monsanto, Syngenta are not at the negotiating table.  

So from a Syngenta shareholder perspective, in my view, the key insights from the Monsanto call are:
  • Monsanto want to talk now/soon, chances of aggression re a bid unlikely at the moment;
  • Message to Syngenta management that Monsanto believe the integrated seeds/crop protection/digital offering can be undertaken;
  • Bayer alternative acquisition mooted in market rumours not a runner for the next few months;
  • Monsanto operationally solid but underlying markets a bit patchy/why they are focusing on cost cuts/innovation

I think that leaves you as a Syngenta holder in a similar position to my analysis on 8 May: if you have a big position due to the sharp run-up of the stock over the last few months then you should have top-sliced it already (and if you haven't taking a few profits is no harm).  

For Monsanto is it more complex.  I noted in the early January piece also linked above that:

'Whilst earnings downgrades due to market conditions have pulled down earnings capabilities I still have the company trading at x14 EV/ebit at c. US$105.  That is still the level for me to instigate a position.  Was I impressed by the quality of the numbers and associated comments today?  Yes...

As I wrote before on the stock:

'Buy shares when they are on sale due to general market fear or specific investor concerns about the company. Hindsight is a wonderful investment educator. But if the stock market has a wobble... then put Monsanto high up your list of shares to look at when the screens are red and the headlines bearish'. '

Looking at the share today, we are fast approaching that level albeit that the valuation has edged up a little due to earnings coming down.  

Of course the risk is that the Syngenta deal requires further and additional monies to close it but we are not at that stage yet and what the combined entity could look like is potentially very attractive. 

So my instinct on Monsanto shares today is still to look at the US$100-105 area for a first potential opportunity buy level, adding each US$5-10 down.  

Still a good theme and hence still of huge interest to investors.  

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