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Has Elders Reached Peak Earnings?

Australia | Mar 16 2022

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

After a strong start to the financial year, brokers wonder if Elders management's upgraded guidance is conservative or peak earnings have already been attained.

-Elders upgrades FY22 guidance after a strong start to the financial year
-Are conditions in FY22 as good as they get?
-ABARES forecasts lower crop production in 2022/23
-UBS feels management guidance may prove conservative

By Mark Woodruff

Following a better-than-expected trading update and FY22 earnings guidance from Elders ((ELD)), brokers within the FNArena database raised their respective target prices.

The database has four broker ratings with two Buy and two Hold ratings and a consensus target price of $14.46, which suggests 8.8% upside to the last share price.

Livestock prices and volumes, as well as retail product sales are key earnings drivers for the company, which provides financial, real estate and agricultural services to rural Australia.

Management now expects FY22 earnings (EBIT) to be 20-30% above the previous corresponding period, implying a range of $200-216m. The midpoint of earnings guidance was an around 15% beat versus the previous consensus forecast.

Macquarie attributes the strong first five months of the company’s financial year to a combination of market and seasonal factors, acquisitive growth and organic growth. While management at the company believes most sales resulted from increased activity, some were forward purchases to mitigate the risk of instability in supply chains.

On a divisional basis, there was an improvement in Retail and Wholesale, Agency continues to perform strongly, and Real Estate is exceeding expectations due to increased turnover and high demand, explains Macquarie. The remainder of the business is thought to be tracking according to expectations.

While near-term earnings tailwinds remain, Morgans feels that in the absence of a large acquisition, the share price and management’s earnings growth target may come under pressure.

The target is to grow underlying earnings (EBIT) and EPS by 5-10% per annum through the agriculture cycles at a 15% return on capital.

However, after Elders has benefited from back-to-back bumper winter crops and a bumper summer crop, the question going forward is: are conditions in FY22 as good as they get?

ABARE forecasts

The Australian Bureau of Agricultural and Resources Economics (ABARES) recently revised upwards its medium-term forecasts for Australian agricultural production.

As this forecast is a key driver of Elder’s earnings, Macquarie revises up its FY22-FY24 EPS forecasts by 16.5%, 21.6% and 16.2%, respectively, after also allowing for management’s upgraded guidance.

Nonetheless, ABARES forecasts lower crop production in 2022/23, given the expected return to more average seasonal conditions. International prices are expected to fall from the very high current levels as global production increases, and the covid-induced volatility and disruption eases.

Brokers’ views on valuation

In maintaining its Hold rating, Morgans points to a high valuation for Elders and suggests earnings growth will moderate from the second half of 2022. Cattle prices are expected to eventually fall from current record high levels.

Citi concurs with Morgans’ valuation assessment to the extent of downgrading its rating for Elders to Neutral from Buy.

Citi feels the company may be faced with less-favourable seasonal conditions and lower commodity and livestock prices over time. Rural Products sales are expected to decline by -8% year-on-year as a result of a turn in the cycle.

On the flipside, further inorganic growth (funded from a strong balance sheet) could present potential earnings upside, points out the analyst.

Also, while crop inputs expenditure has grown markedly over 2020/21, absolute expenditure is only just back to 2016 levels in 2021. Hence, Citi sees the company benefitting from upside to expenditure in 2022, particularly given the nutrient replenishment needed in the wake of two large winter crops.

Running counter to the ‘nearing a peak’ views expressed by Morgans and Citi, UBS wonders if management’s guidance could prove conservative.

The broker sees upside risk to forecasts from ongoing elevated commodity prices and the recent sharp increase in soft commodity prices. It’s estimated the company is currently trading at a -20% valuation discount to the ASX Small Ordinaries index.

Meanwhile, Shaw and Partners, not one of the seven brokers which are updated daily in the FNArena database, maintains a Buy rating with a $16.50 target price, up from $15. This exceeds the highest target within the database of $15.50 set by Macquarie.

While the broker forecasts a mean-reversion of the current very strong conditions in the Australian agriculture sector over a two-to-three-year period, another year of strong conditions should benefit the share price.

In addition, the analyst suggests Elders could add considerable value from further acquisitions that offer material synergies.

Elders remains on Goldman Sachs' Conviction Buy list with a price target of $17.65, whereas Bell Potter sticks with a Hold rating and a price target of $13.65, up from $12.90 previously.

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