Stuart Mitchell of S. W. Mitchell Capital presented his in-depth investment thesis on Yara International (Norway: YAR) at European Investing Summit 2018.

Thesis Summary:

Yara International is the world’s largest fertilizer producer (ammonia, nitrates, and NPKs). The company is also developing a higher value-added crop nutrition business.

Recent history has been challenging for Yara. Following the 2011-2014 farming boom, grain prices fell sharply, stressing the industry. At the same time, Yara and other fertilizer producers had to cope with the extra capacity built up in the “good times”. In particular, western manufacturers faced a flood of cheap urea exports coming out of China.

The outlook, however, is beginning to look more positive again. Chinese exports have fallen by ~60% since the start of 2018. Chinese manufacturers face more stringent environmental rules (75% of production is coal-based) and were heavily loss-making in 2016 ($2 billion). At the same time, Yara’s competitive position has improved relatively due to lower gas feedstock prices.

More difficult market conditions prompted Yara to cut costs aggressively. Management plans to reduce the cost base by $500 million, or ~50% of 2016 EBIT. The team also hopes to add a further $600 million to sales by expanding premium products, most notably in Brazil, and by increasing ammonia production.

Trading at 1.2x book value, the shares appears enticingly valued for a company that has generated 15% ROCE over the cycle in the past.

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About the instructor:

Stuart Mitchell is the Managing Partner and CIO of S. W. Mitchell Capital and the Investment Manager of two funds; the S. W. Mitchell European Fund and the SWMC European Fund, as well as a number of managed accounts. Prior to founding SWMC in 2005 Stuart was a Principal, Director and Head of Specialist Equities at JO Hambro Investment Management (JOHIM, now Waverton Investment Management). At JOHIM he set up and managed the Charlemagne Fund, a long/short European fund, and the JOHIM European Fund, a long only European fund. The JOHIM European Fund rose by 133% since inception in December 1998 until March 2005 compared with 8% for the benchmark index and was number 1 rated by Micropal within its sector and three star ranked by S&P. Upon leaving university in 1987 Stuart joined Morgan Grenfell Asset Management (MGAM) and soon afterwards assumed responsibility for managing the continental European equity assets for MGAM’s British pension fund clients. Stuart was appointed a director of MGAM in 1996. He was then made Head of European Equities and was responsible for $27 billion of equity assets. Whilst at MGAM he managed the Morgan Grenfell European Fund which rose by 123% from January 1990 to June 1996 compared with 85% for the benchmark index and was awarded 1st place by Micropal (5 year awards) in 1996. Stuart was born in Scotland and educated at Fettes College and St. Andrews University where he read Medieval History. He is also a graduate of the Owner/President Management programme from the Harvard Business School. Stuart speaks English and French.