Elders’ Confidence Relies On Acquisition

Small Caps | Nov 16 2022

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

Elders closes the year on a strong note, but heavy rainfall dampens the outlook for coming harvests. 

-Elders reported 39% increase in FY22 earnings year-on-year
-Wet weather poses risk to FY23 outlook, but 5-10% growth target remains
-Acquisition(s) part of controllable mix to achieve FY23 growth guidance

By Danielle Austin

Heavy rainfall already looks to weigh on harvests over the coming year, and coupled with declining trading conditions Elders ((ELD)) anticipates a challenging twelve months ahead. The company delivered a strong final result from the last fiscal year, reporting 39.4% earnings growth to $232m, a beat to growth guidance of 30-40%. 

The solid result was reflective of positive conditions that saw a large summer crop and a historic winter crop, record livestock prices, a buoyant real estate market plus market share wins.

Recent wet weather events on the east coast poses risk to Elders’ production over the coming year, with impacts to some cropping regions that could weigh on both summer and winter crop harvests. 

Elders remains confident in favourable trading conditions persisting over the first half, with demand for agricultural commodities not abating.

The company reiterated a 5-10% growth target for the coming year, but did acknowledge the year ahead would be a challenging one. Management expects further acquisition(s) coupled with organic growth and backward integration can see it achieve growth targets. 

Controllable factors key to achieving targets 

Commentary from both Macquarie and Morgans post the FY22 update is upbeat, focused on the factors within Elders’ control that will help the company meet its targets over the next year despite the challenging conditions ahead. The two brokers have an average target price of $12.91.

Macquarie (Outperform, $14.35) expects Elders will rely on controllable factors to do the heavy lifting in FY23, noting management at the company anticipates growth will be supported by a pipeline of bolt-on acquisitions and ongoing organic growth given the company currently holds only 18-19% market share.

The broker remains somewhat conservative on Elders’ outlook at this point. 

Morgans (Hold, target price $11.46) anticipates Elders will find its growth target difficult to meet as operating conditions begin to normalise. Accounting for higher corporate costs and lower earnings, this broker lowered its earnings forecasts -1.8%, -2.1% and -2.3% through to FY25.

Morgans maintains Elders offers one of safest exposures to the agricultural industry given a diversified business model and strong management.

Elsewhere, both Shaw and Partners (target price $15.10) and Goldman Sachs (target price $18.40) are Buy rated, and highlight the announcement of the departure of the Managing Director may have impacted on market sentiment, with Elders shares falling heavily on the day.

Shaw highlights the company has been prepared to survive and thrive in his absence, and is a well-run company that can deliver strong results under varied market conditions. The subsequent -23% share price decline is labeled "overdone".

Less positive are Wilsons (Underweight, $8.72) and Bell Potter (Hold, target price $11.00). Wilsons anticipates price deflation to weigh on sales and gross profit through the coming year, while Bell Potter finds consensus forecasts have failed to account for the negative operating leverage Elders faces from a normalisation of tailwinds.

The latter broker does find risk reflected in the recent share price decline.

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