Australia | May 24 2022
This story features ELDERS LIMITED. For more info SHARE ANALYSIS: ELD
Brokers universally set higher price targets for Elders in the wake of first half results.
-Elders convincingly beats consensus 1H forecasts
-Growth for rural and wholesale products were highlights
-Market conditions and organic growth lift margins
-FY22 guidance appears conservative
-Hold-rated Morgans and Bell Potter invoke some caution
By Mark Woodruff
Despite a share price trading at 52-week highs, brokers continue to set even higher 12-month target prices for Elders ((ELD)) following first half results.
Underlying earnings (EBIT) rose 80% for the half, a 36% beat compared to the consensus estimate for the provider of financial, real estate and agricultural services to rural Australia. Meanwhile, profit of $91m exceeded the consensus forecast for 65m.
The result was driven by a combination of market and seasonal factors, and both acquisitive and organic growth, observes Macquarie. Rural and Wholesale products were considered the standout with growth driven by strong demand for fertiliser and crop protection products following a favourable season.
All regions delivered growth highlighting to the analyst a diversification of earnings that serves to reduce risk. NSW was the top performer in delivering 103% earnings growth versus the previous corresponding period (pcp).
The gross margin for the Rural Products division improved by 1.2%, while Agency Services benefited from high livestock prices, which more than offset lower volumes. Meanwhile, growth in Real Estate and Financial Services was driven by strong market conditions.
Overall, the company attributed 42% of first half gross margin growth to those strong market conditions, with the balance derived from organic growth (46%) and acquisitions (12%).
Despite higher working capital to support growth, Macquarie highlights a 27.8% return on capital (ROC) compared to a company target of 15% set following the Australian Independent Rural Retailers acquisition in July of 2019.
Management declared an interim dividend of 28cps (30% franked) and upgraded FY22 earnings growth guidance to 30-40% above the pcp, compared to prior guidance for 20-30%. The company is also optimistic about growth in FY23.
Nonetheless, some brokers introduced a note of caution. While Morgans raises its target price to $14.75 from $13.50, a Hold rating is kept as earnings growth should moderate from FY23 and cattle prices will eventually fall from current record high levels. The Hold-rated Bell Potter also reminds investors of tailwinds that have materially assisted since FY19.
Management’s FY22 guidance reflects an element of conservatism, according to Macquarie, as the top end of the range implies a 57/43 first half/second half earnings skew compared to the historical 45/55 spilt.
The broker retains its Outperform rating and raises its target price to $16.54 from $15.15.
In raising its target price to $15.50 from $13.90, Bell Potter agrees and points out the upper end of guidance implies 8% year-on-year growth in second half earnings. This is considered modest when current tailwinds for fertiliser and agricultural-chemical prices, as well as livestock turnover are taken into account.
As good as it gets?
Goldman Sachs feels there is a misconception among investors that this is as good as it gets.
The analyst disagrees as Elders is well-positioned to deliver sustainable earnings growth over the medium term and notes management is committed to delivering further 5-10% earnings growth in FY23.
More than 50% of the growth reported in the first half reflected ongoing execution of the company’s strategy, according to the broker. It’s thought ongoing medium-term organic growth should arise from market share growth and margin expansion from a backward integration strategy that is only around 50% complete.
Goldman Sachs continues to be attracted to management’s strong track record and a good overall industry structure and raises its target price by 14% to $21. An attractive valuation and potential for a positive earnings surprise are also considered to support a Buy rating.
Meanwhile, Buy-rated Shaw and Partners lifts its target to $20 from $16.50 and points to a strong upcoming winter cropping season (based upon April 2022 Bureau of Meteorology rainfall data) that should benefit the company in both FY22 and FY23.
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