Australia | 10:00 AM
After missing on third quarter earnings, Elders' fourth quarter looks much brighter plus approval of the Delta acquisition will drive significant synergies and new earnings capacity.
-Adverse weather leads Elders to miss on updated FY25 guidance
-FY26 should see improved conditions
-Approval of Delta acquisition brings boost from synergies and earnings
-Buy ratings all round
By Greg Peel
Elders ((ELD)) is the go-to business for everything agricultural in Australia and New Zealand. Morgans calls Elders “the Bunnings of the Bush” in term of agri-products.
The business extends into real estate, insurance, financing and other services.
As an agricultural company, Elders' fortunes are very much beholden to the weather. Based on earlier BOM forecasts, the big dry being suffered in the south, particularly South Australia and western Victoria, did not ease as expected in the third quarter, but the fourth quarter is looking more promising.
Elders accounts on a September year end, hence its third quarter ended in June.
Due to the persistent dry, Elders’ recent trading update provided FY25 earnings guidance -9% below consensus expectation.
Approval Finally Received
Overshadowing the weak update was the announcement the ACCC has finally approved Elders’ takeover of (unlisted) Delta Agribusiness after an extended delay.
Delta Agribusiness is a leading independent rural inputs and advisory service in regional Australia, with a strategic footprint across NSW, Queensland, Victoria, Western Australia and South Australia.
The similarities are eerie, which is likely why the ACCC agonised over its decision. Ultimately, the regulator demanded only the divestment of six Delta outlets in Western Australia, which analysts note earned less than a combined $0.3m in FY25 (June year-end) -- immaterial given the synergies on offer.
Delta will expand Elders’ network by a net 62 locations post divestments and 40 wholesale customers and, importantly, Morgans suggests, fills key gaps in NSW, Victoria, South and Western Australia. Additionally, it will enhance Elders’ technical expertise and offering in ag-tech and precision agriculture.
Delta is a strong brand, Morgans notes, and is well managed. Elders’ expectations of synergies of $12m over three years should prove to be conservative given they are solely around backward integration benefits.
Morgans also expects there are benefits from increased buying power as a larger group. Over time, there is an opportunity to expand Delta’s network, product and services offering. In addition, there will be benefits from placing Delta on Elders’ new IT systems.
Given the delay in receiving ACCC approval, Morgans thinks Elders will now fast track this timeline.
While Canaccord Genuity held the view that ACCC approval was likely, the drawn-out process and residual uncertainty was weighing on the share price.
The acquisition rationale is compelling, in Canaccord’s view, led by the complementary nature of Delta’s strengths in Retail Products in NSW with Elders’ strengths elsewhere on the east coast, as well as margin expansion synergies via backward integration.
The -$475m acquisition will be funded by last year’s $246m non-renounceable entitlement offer; a new $110m debt facility; and $190m of scrip issued to Delta shareholders at $8.52, who will own 10.45% of Elders.
Delta is owned and managed by the people that work within the business.
Things Can Only Get Better
Delta's FY25 performance was equally negatively impacted by dry conditions in Southern Australia, Macquarie notes. Margins were also impacted by heightened competitive pricing from a later season and crop protection traders seeking to avoid carry-over inventory. Macquarie highlights minimal lift in agchem prices over the last six months.
Yet, the outlook for Delta remains in line with the acquisition case from back in December last year.
Conditions in South Australia and western Victoria improved from June, resulting in increased crop protection demand in the September quarter, Macquarie notes, however this has not completely offset June quarter weakness.
The Agency business should benefit from a lift in livestock pricing which is being driven by a supportive backdrop for protein, particularly from the US where Australian beef is seeing strong demand as the US herd plumbs 70-year lows and prohibitive tariff rates (50%) have been applied to Brazilian imports.
Volumes will likely be lower, given restocking activity across northern states on optimal seasonal conditions offsetting some of benefit from higher pricing.
Elders’ softer guidance reflects a materially softer outcome in crop protection margins in the second half, which has more than mitigated the stronger trends visible in Agency. While disappointing, Bell Potter notes most forward indicators of activity are starting FY26 with double digit year-on-year gains in areas such as livestock, wool, fertiliser and crop protection pricing.
Given the inherent risk around unpredictable weather patterns, Citi thinks it is prudent to err on the side of caution when it comes to a progressive recovery pertaining to crop protection in FY26. Citi is factoring in partial recovery in FY26 versus FY25 but acknowledges the risk is likely to the upside.
The key question for Elders are its earnings for a “normal” year. While momentum in the September quarter is encouraging, first half and June quarter drags are stark reminders of inherent volatility across the industry, Citi warns.
On that basis, Citi thinks a “normal” year should factor in potential perseverance of challenging conditions in some regions. The broker estimates earnings headwinds from a dry South Australia and western Victoria in FY25 to be around -$24m. Instead of simply adding the full $24m back to FY26 earnings, Citi thinks it is prudent to assume partial recovery in FY26 for now and err on the side of caution.
The closing of the Delta transaction is clearly a positive development, Bell Potter suggests, given the elongated acquisition timeline and in isolation is expected to be some 10% earnings per share accretive.
In addition, Bell Potter sees encouraging indicators heading into FY26, with crop input prices (fertiliser and glyphosate tech), livestock prices (cattle, lamb and mutton) and wool prices all demonstrating double digit year-on-year gains.
A more normal selling pattern in FY26, delivery on systems modification and backward integration initiatives, sector activity tailwinds and consolidation of Delta are expected to drive high double-digit earnings growth in FY26-27.
This view does not look reflected in the current share price, Bell Potter believes, with Elders trading at around an 11x PE on its forward projections. (for FNArena's consensus forecasts and PE multiple, see Stock Analysis).
While it is disappointing that FY25 guidance materially missed expectations, Morgans notes the seasonal break came late in Elders’ financial year. Importantly, FY26 should be a big year for the company and Elders has many growth projects in place to deliver strong earnings growth over coming years.
The ACCC approval now provides certainty and Elders can get on with merging the businesses and delivering the targeted synergy benefits. Elders is one of Australia’s leading agribusinesses, Morgans notes. It has an iconic brand and is diversified by product, service, market segment and geography.
The stock’s trading multiples are seen as undemanding and it also offers an attractive dividend yield.
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