Shares digital

Yara International (OGJZ) – Nkr266 (£24.65), stop loss Nkr213 (£19.70)

SHARES SUMMARY

The share rise is flattered in sterling terms as the pound has fallen against the krone, and this trend is expected to continue. With Yara increasing sales and profits, the shares could rise another 20% by the year end.

Business:

World’s largest fertiliser manufacturer based in Norway

Vital stats:

Market value: £7.2 billion

Historic PE 2006: 18

Prospective PE 2007: 15

Prospective PE 2008: 11.6

Sector PE: 13

1-month relative strength: 5.6%

1-year relative strength: 81.6%

Yield 2007: 0.95%

NMS: 500

Spread: 10%

What better way to take advantage of the boom in cereal crops and prices than to buy shares in a prime beneficiary – the world’s leading fertiliser manufacturer, Yara – which means ‘harvest’ in Norwegian.

Admittedly, there are a couple of difficulties for UK-centric investors. Firstly, as a Norwegian firm, its primary listing is in Oslo, although it does have a secondary one here on the London Stock Exchange, but that does imply currency risk.

The problem for UK investors wanting to invest in top-class global leaders is that an increasing numbers of them are not British, and those that were have been taken over by foreign groups.

The good news is that Yara owns Fisons, which older readers may remember as the world’s first fertiliser company, created nearly 150 years ago. Yara, when it was part of Norsk Hydro, snapped up Fisons in 1982.

Yara, founded in 1905, demerged from Norsk in 2004, since when its share price has rocketed six-fold, rising from Nkr50 to Nkr266. Its share of the global nitrogen fertiliser market is around 8% after the purchase of Finnish rival Kemira last year.

The company is growing rapidly, both by acquisition in a fragmented market, and organically. It also bought two Brazilian fertiliser companies last year in what Yara sees as the world’s bread basket of the 21st century, replacing America.

Argentina is close behind as the world’s second biggest corn exporter, and is also big in soyabeans and wheat. But its use of fertiliser is relatively low compared with Brazil and India.

To make nitrogen fertiliser you need natural gas, which is another reason Yara is rapidly expanding production as well as sales in Latin America. Chinese and Indian demand for more food is the main reason for the boom.

Fertiliser prices have soared due to higher gas prices and increased consumption by farmers. Production has not been able to keep pace with demand. Urea is up 43%, nitrates up 55% and ammonia up 40% since the start of 2007. Hargreave Hale investment adviser George Finlay says ‘this looks like a relatively early-stage bull market compared with industrial commodities, where the bull market has been in place for a number of years.’

A small change in eating habits, with a bit more meat, means a lot more grain needs to be produced to feed cows, sheep and pigs. Without fertilisers world food production would be 40% lower.

Fertiliser sales have grown 11% a year since 1999 and are accelerating. Yara has sold its ammonia shipping fleet and half its industrial gases operation to concentrate on fertilisers.

Earnings for the first nine months of 2007 rose from Nkr10.85 to Nkr13.6, on sales up from Nkr35.8 billion to Nkr40.1 billion.

Analysts have lifted their 2008 and 2009 forecasts by almost a third in recent months, leaving the shares trading on a 2008 PE or only 11.6, falling to just 10 in 2009. Dividends are rising, although the yield sits at less than 1%.

Yara has 50 operations around the world and sells to 120 countries. Fertiliser production rose 7% last year and will rise by at least as much this year and next.

The Krone has appreciated by almost a quarter against sterling since 2000 and this trend is expected to continue backed by Norway’s huge gas reserves.

Yara shares are traded in depositary form in London but the market is reasonably liquid, although a spread of around 10% is a little off-putting. That said, a good broker should be able to get inside this, perhaps cutting it in half.

Hargreave Hale’s Finlay has a target price of Nkr325 by Christmas, which implies about £30 in our money, a potential profit of more than 20%.

by: Timon Day