Conditions Improve Markedly For Elders

Australia | May 22 2020

Favourable winter cropping conditions ahead are likely to mean a big improvement in demand for farm inputs from Elders, benefiting results in the second half and into FY21.

-Return to normal cropping season expected in FY21
-Economic downturn has potential to subdue real estate
-Benefits from acquisitions to be fully realised in the year ahead

 

By Eva Brocklehurst

Recent months have sharply improved the outlook for Elders ((ELD)) as rural Australia takes a turn for the better. Drought affected the majority of the first half but the final months were much more favourable.

Better-than-average winter cropping conditions, amid widespread rainfall over the east coast at the start of 2020, will mean a big improvement in farm inputs and, along with higher livestock prices, has given impetus to broker forecasts.

The company, while not providing specific guidance, has indicated it is comfortable with consensus forecasts for FY20 earnings (EBIT) of $96.5-112.9m and net profit of $85.8-102.9m.

Bell Potter notes 2017 was the last "normal" season when there was a summer and winter crop. From this, the broker deduces a normalised earnings level of $131-136m, based on FY19 activity levels in the agency segment.

The broker also notes the balance of debt continues to be offset by working capital investment, which is in excess of what the business has averaged since 2014. Consequently, a cash release is expected at some point when normal seasonal patterns occur.

Meanwhile, the Titan acquisition now appears to have been wedded to the Elders business, and management expects it will generate earnings double the original acquisition metrics in FY20.  Elders is also expected to benefit in FY21 from a full 12 months of the AIRR acquisition, a member-based buying and marketing group for independent rural merchandise, pet & produce stores.

The latter's contribution in the first half was better than Morgans expected, with integration progressing and synergies of up to $1m already being realised. The broker downgrades to Hold from Add and raises the target to $10.20, given the rise in the share price, but the stock remains one of its preferred companies in the agricultural sector.

Wilsons, too assesses the valuation is full, retaining an Underweight rating with a $7.71 target. The broker notes cash conversion was weak in the first half, partially explained by the timing of the seasonal break for winter cropping, and assumes a return to average seasons in FY21.

Bell Potter agrees FY20 is unlikely to produce earnings that reflect what the business really can generate in a normal cropping year, given such a small summer crop, and retains a Buy rating with an $11.75 target.

While there is some uncertainty from the implications of the pandemic, in terms of demand and supply chains in agriculture, Morgans does not expect it will have material impact on that segment, given agriculture is an essential service.

Tailwinds from livestock and the retail segment are expected, although the economic downturn has potential to subdue real estate, amid deterioration in values and/or volumes, as well as wool sales.

Bell Potter points out real estate and wool are smaller contributors to the business. Industry forecasts are for a decline in Australian shorn wool production of -6.3% over FY20 and a further decline of -17% in FY21. Australian dollar wool prices are at the lowest level in five years.

Sales of woollen garments are expected to suffer as part of the global economic downturn and growers are also stockpiling wool rather than selling at low prices. Bell Potter expects, ultimately, volumes will return but tempers assumptions for FY20.

Cattle prices, meanwhile, are expected to remain high because of re-stocking demand and tight supply while sheep and lamb prices are also likely to be strong, albeit on lower volumes.

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