Citi sees tough third quarter for Makhteshim Agan

Citi predicts that agrochemicals maker Makhteshim Agan Industries Ltd. (TASE: MAIN) will face a tough third quarter, but sees better times in the long term. Citi reiterated its "Hold/high risk" recommendation for the share, and cut its target price to NIS 22 from NIS 24.

Makhteshims share fell 2% in morning trading to NIS 17.64, giving a market cap of NIS 7.83 billion.

Citi analysts led by Andrew Benson noted weak demand during the third quarter, due to "some erosion in farm profitability (lower grain prices) and adverse weather effects". Specifically, it points to a collapse in glyphosate pricing, will affect Mahkteshim because it still has some excess inventory, and a 3% decline in demand during the first half means that farmers are well stocked and do not need to buy more to ensure supplies. Citi estimates that Mahkteshims glyphosate third quarter sales will be 20% less than in the corresponding quarter.

Citi also cites pressure on prices, noting, "the drift upwards has come to an end." It expects prices to be flat at best in 2010, with prices for some products falling, led by glyphosate.

In summing up, Citi says, "While we believe the long-term prospects for volume growth are good, we need to be more reassured on Makhteshim’s earning power, at the current valuation, to be more positive on the stock."

Citi predicts that Makhteshim will post a net profit of $113.7 million ($0.26 per share) on $2.2 billion revenue in 2009, and a net profit of $136.6 million ($0.31 per share) on $2.32 billion revenue in 2010.