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Elders: Singing In The Rain

Australia | Nov 17 2021

This story features ELDERS LIMITED. For more info SHARE ANALYSIS: ELD

A solid results beat from Elders had a lot to do with favourable weather conditions, but brokers agree the company’s positive outlook is not solely weather-dependent

-Elders FY21 solidly beats consensus
-Seasonal conditions the primary driver
-Offering several other growth drivers beyond favourable seasons

By Greg Peel

It is a truth universally acknowledged that if one invests in an agricultural company one is placing oneself in the hands of the weather gods. For Elders ((ELD)), it’s been a case of famine to feast on an earnings basis as three years of devastating drought have given way to two years of quite the opposite.

From 2017-19 drought to 2020-21 above-average rainfall, Elders share price has recovered by 200%.

Yet while crop harvests and livestock prices will always be significant drivers of Elders’ performance, the company is executing on its plans to drive longer term earnings through other means than looking nervously out the window, and brokers see this as a distinguishing factor.

All things to all farmers

There is very little, if anything, Elders cannot offer farmers of crops or livestock. From seeds, fertilisers and animal health products, to farming advice, livestock and wool sales agency, to rural real estate agency and property management, to rural loan broking, banking and insurance, and all the way to meat processing and distribution, Elders is a farmer’s one-stop shop.

And that all-encompassing diversity is only set to grow.

Elders’ FY21 results materially beat consensus forecasts. Solid earnings growth was supported by both revenue and margin growth, and driven both organically and through no less than nine bolt-on acquisitions in the period.

No less? Elders is eyeing off 27 more potential bolt-ons.

The Rural Products vision was the primary outperformer, with favourable seasonal conditions leading to bumper harvests and soaring livestock prices (farmers continue to re-stock after having been forced to de-stock during the drought).

The division’s performance was also boosted by the “backward integration” of rural products retailer Titan Ag, which had sold all its products through Elders since 2006 but has now been fully acquired, and a full year since the acquisition of Australian Independent Rural Retailers, which despite the name offers wholesale rural services. Although these did increase corporate costs in the period

Backward integration is the acquisition of businesses that were previously your suppliers.

Livestock agency was not quite as impressive despite higher prices, as volumes were weaker. The only underperforming division was meat processing, ironically because of those same higher livestock prices. But that division represents only 2% of total earnings.

Real estate agency also saw solid growth as demand for rural property has returned in earnest since the drought, and more so since covid, as many have chosen to escape plague-ridden cities to the joys of fresh air.

But while it was a result to be remembered and celebrated for some time, the question is can the good times continue to roll, or will Elders forever be beholden to the perennial climate cycle of wet and dry? (Don’t mention climate change.)

Other Drivers

Management is expecting a continuation of positive seasonal conditions and elevated livestock prices over FY22-23, but does not provide specific guidance. Brokers acknowledge ongoing conditions but also warn cattle prices will not be as elevated forever.

However, Elders has a cunning plan. Well, several actually.

One plan is to gain market share in new geographies with the company’s wide product and services portfolio. Analysts agree there is a broad opportunity here, as currently Elders can only boast 18% market share.

Further support will come from the aforementioned 27 bolt-on acquisition targets and ongoing backward integration of Titan and AIRR.

And as is the case with virtually every long-established business (Elders was founded in 1839), there are benefits to be had from planned systems modernisation.

Put it all together and brokers are as one in agreeing Elders future growth lies beyond just the fickle vagaries of the weather. The only question is as to whether the market has already priced this in.

Too Rich?

Of the four FNArena database brokers covering Elders, UBS, Macquarie and Citi all like the growth story and have Buy or equivalent ratings. Macquarie, for one, believes a 16.5x forward PE is attractive in the context of the company’s growth profile.

Goldman Sachs, not in the database, goes further in suggesting the rural products/services industry could go the way of supermarkets and DIY hardware over the last 20 years in consolidating towards only a few big players, and Elders is well positioned on this basis. Goldman rates a Buy.

Database broker Morgans, on the other hand, finds valuation on an enterprise value to earnings multiple basis to be sufficient, and looks ahead to lower cattle prices in rating Hold.

Outside the database, Bell Potter (Hold) believes upside is well understood by the market, while Wilsons is Underweight.

Disparity is reflected in a wide range of targets, from $15.65 from Goldman Sachs (last price $11.77) to $10.03 from Wilsons.

As unpredictable as the weather, perhaps.

Database broker targets net out to $13.60, suggesting 15.5% upside.

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