Diversity Helps Elders But Soft Outlook Prevails

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Brokers observe Elders has withstood the impact of the drought better than many of its peers in FY19 thanks to its diverse earnings streams, although the outlook is subdued.

-Poor expectations for summer crop demand
-Main downside risk is if an “average” winter crop does not eventuate
-Acquisition of AIRR enables enhanced buying power
 

By Eva Brocklehurst

As a weak light in an otherwise gloomy outlook for the agricultural sector, Elders ((ELD)) reported a reasonable FY19 result, with a stronger performance on cost control and acquisitions offsetting lower wool volumes and softer outcomes in agency & financial services.

Morgans, which has an Add rating and $7.10 target, found the FY19 outcome solid, considering the severity of the east coast drought and the adverse impact on summer crop demand and wool volumes.

No formal FY20 guidance was provided but acquisitions are expected to lift results and Elders has reiterated its goal of 5-10% earnings (EBIT) growth through the cycle. The company anticipates a below-average summer crop and the main downside risk, brokers envisage, is if at least an "average" winter cropping season does not eventuate in FY20.

Underlying earnings (EBIT) fell -1.2% in FY19 and net profit was flat. Acquisitions contributed $10.2m to earnings, primarily Titan and Livestock in Transit. Revenue was up 4% while operating cash inflow of $11.2m compared with an outflow of -$12.1m in FY18.

Cash conversion was weak and working capital continued to build, rising to $286.6m. This reflected the impact of higher livestock debtors, more working capital requirements for Titan and lower stock turnover.

Challenges were reflected in the Australian network income which declined -4.8%. An increased margin in real estate, greater cattle volumes and higher lamb & sheep prices offset a portion of the headwinds.

Relative to peers, nevertheless, Morgans believes Elders is best placed to withstand the current environment and eventually benefit from a seasonal recovery, given its diversified business model. Elders is highly leveraged to a rising cattle price that will occur once it rains and farmers need to re-stock.

Feed and processing revenue increased 9.9% and margins rose to 4.0% because of higher utilisation rates at the Killara feedlot. The company intends to capture more margin through backward integration amid stronger buying power post the acquisition of Australian Independent Rural Retailers.

Elders will officially acquire Australian Independent Rural Retailers on November 13. This is a buying and marketing group for independent rural merchandise and pet & produce stores. Bell Potter, which has a Buy rating and $8.15 target, agrees FY20 hinges on an average winter crop, which would provide a solid platform for growth along with the acquisition of AIRR.

The broker assumes a normal winter cropping season, along with a 10-month contribution from AIRR and continuing transition of the agricultural chemical business to Titan. The company can also benefit from further consolidation opportunities. Elders has stated it intends to maximise cross selling and will continue to evaluate potential acquisitions, focusing on expansion that enhances diversity.

Wilsons, which has a Market Weight rating and $6.51 target, expects significant earnings growth over the forecast period, led by the AIRR acquisition and assuming an improvement in seasonal demand for crop inputs.

However, the broker perceives potential network opportunities arising from the Nutrien/Ruralco merger are countered by the emergence of channel conflict within the Elders network and the fact that AIRR and its CRT wholesale business are very different.

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