Australia | Mar 09 2021
This story features ELDERS LIMITED. For more info SHARE ANALYSIS: ELD
Improved farm income from bumper crops is good news for Elders, while livestock & wool conditions should also contribute to earnings growth
-Livestock pricing close to record levels
-Cropping conditions well ahead of prior year
-Should Elders trade at a higher multiple?
By Eva Brocklehurst
Resurgent farm incomes should flow through for Elders ((ELD)) after a recovery in seasonal conditions in 2020. Farm incomes, rural forecaster ABARES assesses, are likely to rise 15% in 2021 before easing back to more average levels.
Moreover, lower energy prices have reduced the cost of fertiliser as well as fuel, while fodder and seeds costs are also expected to be lower. Livestock prices have been strong, as graziers re-stock herds.
Citi upgrades assumptions as a result, which drives expectations of 7% growth for Elders in FY21 and considers the high return on capital and resilient growth profile attractive. The broker now expects rural product retail sales will grow by 20% in the first half. Rural products accounted for 43% of the company's gross profit in FY21.
Macquarie forecasts 8% growth in earnings for the three years to FY23, at the upper end of the company's 5-10% growth target. The outlook is for continued rainfall on the east coast and pasture growth through autumn, so re-stocker demand for cattle and sheep should maintain livestock prices close to record levels.
Bell Potter totts up the annualised benefit to Elders of recent acquisitions, including the migration of genetic veterinary chemicals and agricultural chemical sales to the Titan & AIRR portfolios. Along with favourable tailwinds in livestock & wool agencies the broker expects all divisions will contribute to growth in FY21-23.
Macquarie points out Australia's rural exports are forecast to fall -4% in 2021 as herds continue to be re-built, and despite the benefit from higher grain production. In contrast, a record 6% increase in exports is anticipated in 2022 because of higher cotton, wool and dairy exports.
Elders should trade at a higher multiple compared with peers, in the broker's view, as the business is more diversified and this results in relatively defensive earnings during seasonally weak conditions. The broker notes the multiples of comparable agricultural companies trade an average of 14.4x FY21 earnings (EBIT) while Elders currently trades on 13.2x.
Producers have actively retained stock to re-build herds and take advantage of better pastures which has meant sale yardings have been down significantly over the year to date, despite this being a seasonally higher period for yardings.
Australian cattle prices have become disconnected from international export fundamentals during the re-building of herds after the drought and when re-stocking demand subsides processors will need to pick up the slack, Citi observes.
In turn, given current export demand is subdued, they may find it hard to do so at current prices. From the second half, the broker expects livestock prices will decline amid an influx of lambs after a productive breeding season and as re-stocker demand for cattle eases back.
The impact of increased slaughter supply on prices should be more pronounced in FY22, particularly for cattle, although the impact on Elders could be partially offset by enlarged saleyard volumes.
A record winter crop harvested over summer supported farmers, although the latest 2020-21 summer crop forecasts has meant production was revised downwards because of a drier spring (November).
Nevertheless this summer crop is still well ahead of the previous year. Meanwhile, global shortages, supply chain constraints and increased domestic demand have meant crop input markets are tight. Diammonium phosphate fertiliser prices were up 45% in January, with industry feedback indicating prices for crop protection remain firm.
ABARES is currently expecting just one El Niño year to occur in the next five years, with the other years in neutral territory. Based on historical probabilities, Citi assesses 2023 will be the El Niño year and currently factors in a deceleration in growth in FY23.
The La Niña phase peaked in early January and the Bureau of Meteorology expects settings will return to neutral or average conditions for many parts of NSW and Victoria over autumn/winter.
Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Buy rating with a $13.60 target. FNArena's database has two Buy ratings and one Hold (Morgans). The consensus target is $12.89, suggesting 9.5% upside to the last share price. Targets range from $11.68 (Morgans) to $13.80 (Macquarie).
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