Sumitomo Chemical Is Not Giving Up on Agrochemicals

by: Clemens Scholl

On Friday (Dec 17, 2010) Sumitomo Chemical (OTCPK:SOMMY), the Japanese chemical giant, announced (.pdf) it will acquire Indian agrochemical manufacturer New Chemi Industries Ltd. The acquired company manufactures crop protection products, and has been a partner of Sumitomo Chemical since the year 2000. This represents one further step by Sumitomo Chemical to aggressively expand its operations in the crop protection business, which is dominated by other international giants such as Monsanto (NYSE:MON), Syngenta (NYSE:SYT), BASF (OTCQX:BASFY), Bayer (OTCPK:BAYRY), DuPont (DD) or Dow Chemical (DOW). Currently, Sumitomo Chemical derives only 13% of its sales from agrochemicals, a business unit the company is looking to grow.


Market cap

Yen 646 bn

Mainly traded on

Tokyo Stock Exchange, Code 4005

52 week share price range

330 – 487 Yen

Book value per share, equity ratio

351.35 Yen (23.8%)

Dividend forecast for 2011

9 Yen/share (2.3%)

Sales breakdown (2009 fiscal year)
total sales: Yen 1.6 trn

Basic chemicals 13%
Petrochemicals 30%
Fine chemicals 4%
IT-related chemicals 16%
Agrochemicals 13%
Pharmaceuticals 17%
others 8%

Also on Friday, Sumitomo announced (.pdf) it has reached a new toll manufacturing agreement in Australia with Nufarm (OTC:NUFMF), further cementing the cooperation between the two companies in the crop protection business. Nufarm is one of the world’s leading crop protection companies, but it has recently fallen on hard times.

Early this year, Sumitomo became a 20% shareholder in Nufarm, buying shares at AUD 14 per share and topping a bid of AUD 12 per share for the whole company by China’s Sinochem.

However, the investment has not paid off so far. Following a string of profit warnings (blamed mostly on plummeting prices for Glyphosate, which has also been a large problem for Monsanto) and a breaching of debt covenants, Nufarm shares fell as low as AUD 3.20 in July, a whopping 77% paper loss for Sumitomo in just a few months.

Currently, Nufarm's stock has recovered to around AUD 5.00.

Despite its (in retrospect) ill timing, Sumitomo probably still bought into a sector with nice growth prospects, and they are still pursuing their strategy of expanding into this sector, as shown by Friday’s announcements.


Market cap

AUD 1.3 bn

Mainly traded on

Australian Stock Exchange, Symbol NUF

52 week share price range

AUD 3.20 – 11.38

Book value per share, equity ratio

AUD 6.68 (56%)

Dividend forecast for 2011

AUD 0 (0%)

Major shareholder

Sumitomo Chemicals (20%)

Another agrochemical and biotech company whose share price has taken a large hit recently is the Belgian small cap Devgen. The company (in which, among others, Monsanto holds a 6% stake), is developing hybrid and biotech traits and mainly sells its products in the Asian markets. It is also developing nematicide chemicals for crop protection, and has been a partner of Sumitomo Chemical since 2001 for the development of these products. The cooperation agreement between Devgen and Sumitomo has been renewed until 2012. Devgen receives research funding from Sumitomo and will be entitled to royalties once the products are successfully launched.

Devgen announced disappointing results last month, mainly because of low sales of sunflower seeds in India, which outshined its growth in hybrid sorghum and hybrid rice sales in India. As a consequence, Devgen’s share price has collapsed from EUR 12 at the beginning of the year to EUR 5, slashing its market cap to under EUR 100m. Currently, the market is fearing a capital increase might be necessary, as the company forecast only having a EUR 20m cash pile by year end.

Taking advantage of the collapse in Devgen’s shares, undisclosed parties have acquired a stake over 5% (.pdf) in Devgen. Given the strong ties with Sumitomo, and the tradition of Japanese companies acquiring minority stakes in business partners, it would not be unthinkable that Sumitomo would participate in a potential cash call from Devgen. It would certainly fit into its strategy of increasing its footprint in the agrochemicals business.

DEVGEN N.V. (no US listing)

Market cap

EUR 98.3 mn

Mainly traded on

Euronext Brussels, Symbol DEVG

52 week share price range

EUR 4.87 – 11.95

Book value per share, equity ratio (HY 2010)

EUR 2.28 (62%)

Dividend forecast for 2011

EUR 0 (0%)

Major shareholders

O.G.B.B. A. Van Herk B.V. (15%)
Biovest ComVa (Rudi Marien) (11.2%)

Monsanto (MON) (5.3%)
Undisclosed party (5.1%)

Disclosure: I am long MON, SYT. I am long Devgen shares on the Euronext Brussels exchange as well. I own Syngenta shares (traded in Switzerland), and not the US ADR's (SYT). Please perform your own due diligence before trading in any securities.