Cycle Optimism Building For Elders

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

A dry first quarter impacted on Elders’ FY24 earnings but more normal conditions are already prevalent in FY25.

-Elders’ FY24 earnings in the low half of guidance
-A weak first quarter was the main culprit
-A more normal first quarter FY25 is aiding a rebound
-Acquisition of Delta Ag offers further upside down the track

By Greg Peel

Elders ((ELD)) is effectively a one-stop shop for Australian farmers, offering everything from chemicals, livestock sales agency, stock and station agency, insurance, and beyond. Recognising the volatility of agricultural cycles, Elders offers an investment case “to deliver good returns in bad years and great returns in good years”.

FY24 (September year-end) was not a great year, also impacting on other listed agricultural companies having reported to date. Earnings (EBIT) came in at $128m, slightly below consensus of $130m and in the lower half of $120-140m guidance. Analysts saw the result as “mixed”.

On the positive side, Elders’ high-margin Agency business delivered a vastly improved second half performance, with gross profit up 35% year on year, driven by a significant increase in cattle sales yard volumes. Unfortunately, notes UBS, this was somewhat offset by further softness in Elders AgChem.

This product segment seemingly continues to be impacted by price weakness and/or poor inventory price procurement, the broker suggests. Cash generation was also disappointing with Elders delivering operating cash flow in the seasonally strong second half of just $34m versus $49m in the first. One offset is $127m of receivables (debtors) collection that has been deferred to the first quarter of FY25.

Deferred receivables contributed to Elders’ gearing ratio rising to 3.1x against a target range of 1-5-2.0x, as did the cost of acquisitions made in the period and the impact of a weak (dry) FY24 first quarter, Macquarie notes.

The company’s return on capital metric declined again through the second half to long-term lows of 11% versus a target of greater than 15%. The minimum ROC target of 15% reflected a key part of the Elders’ aforementioned investment case to “deliver good returns in bad years and great returns in good years”.

While UBS acknowledges some of the ROC deterioration is explained by an unusually poor first quarter and cost investment ahead of earnings benefits in Wool and Systems Modernisation, it is still disappointing and a key metric the broker is focused on to become more constructive on the stock.

Rebound Pending

Macquarie believes there is a pathway back for Elders’ gearing ratio to fall back within the target range supported by the collection of deferred receivables and normalisation of FY24’s weak first quarter (FY25 to date not so dry).

Wilsons continues to expect strong earnings growth in FY25, primarily led by the annualisation of a recovery in livestock prices and recent acquisitions.

Despite a mixed bag of a result, Elders appears to Citi to be well placed. The key question is a pathway to the $170m in earnings in FY25 the broker is forecasting. Citi thinks first quarter normalisation alone could make up more than 75% of the difference between its FY25 forecast and the $128m posted in FY24.

In the most recent four years excluding FY24, first quarter earnings have averaged $32m which is greater than 75% of the difference between Elders’ FY24 earnings and Citi’s FY25 forecast.

Elders provided no quantitative guidance, however, Wilsons notes management is optimistic about the 2024-25 summer crop. A gradual improvement in Rural Product margin is expected, assuming continued stability in crop protection prices.

Price stability is expected in the livestock market, but volumes may be impacted in FY25 from dry conditions in South Australia and Victoria.

Real Estate is forecast to see an increasing gross margin supported by a full-year contribution from acquisitions and improvement in market conditions, although interest rate pressures are to remain a headwind.

Delta Ag

Elders has also announced the acquisition of Delta Agribusiness for -$475m, funded by a $246m capital raising, $190m of new shares to Delta shareholders, and $110m of debt, with $60m net of funding proceeds to be used for balance sheet flexibility.

Wilsons sums up agreement among analysts the acquisition is mildly positive, with an attractive strategic rationale partly offset by what is seen as a full price at an earnings to enterprise multiple of 11.1x (8.7x post-synergies).

The key acquisition rational is to provide immediate and improved geographic diversity filling retail presence gaps mainly in NSW, UBS notes, where Elders was underweight, but also North West Victoria, Western Australia and parts of South Australia.

The $12m of management’s expected synergies largely relate to revenue synergies from backward integration of Elders-owned Titan AgChem products. UBS highlights these will be delivered over three years and back-end weighted to FY26-27.

While the multiple paid for Delta Ag appears elevated, Citi considers this to be a sound acquisition given it is highly complementary to Elders, synergies are likely to be conservative, and the company has a strong track record in acquisition and integration. This broker assesses Delta Ag will be 5% earnings per share accretive pre-synergies and 15% post-synergies.

The acquisition is subject to ACCC approval but Citi thinks the risk of the transaction being blocked is unlikely on the basis of Elders’ market share. Nonetheless, analysts are not rushing to include the acquisition into their valuation models just yet, with the deal expected to be completed in the first half of 2025.

Upside Nonetheless

That said, analysts are taking Delta Ag into consideration within their recommendations.

Bell Potter had already forecast a strong rebound in FY25 earnings on improved first quarter operating conditions and recent business investment. The proposed acquisition looks likely to aid the next leg of growth into FY26-27, the broker suggests.

Bell Potter’s target price, which “has consideration for the Delta acquisition” is unchanged at $9.25. The broker has not yet incorporated Delta into its earnings forecasts, enterprise value and market cap. Bell Potter retains a Buy rating.

While the industry is volatile and cyclical, Elders’ dividend payout ratio being well ahead of the target range in FY24 indicates confidence around perseverance of average trading conditions in FY25, in Citi’s view. Citi also has an unchanged Buy rating and target of $9.75.

Macquarie is advising Elders in the acquisition process and thus currently on research restriction.

Given restrictions, Delta forecasts are not incorporated into UBS’ valuation and this broker’s target remains unchanged at $9.00. As noted earlier, UBS was disappointed in Elders’ low return on capital and the broker will focus on this key metric before coming more constructive on the stock. UBS retains a Neutral rating.

Shaw and Partners last had a Buy rating and a $9.10 set following the release of ABARES June 2024 Australian Crop Report, but is yet to update on the FY24 result.

Of the five brokers monitored daily by FNArena covering Elders three are Buy or equivalent rated at this stage with one Hold and one on restriction. The consensus target is $9.33, noting no target changes were made among this group.

Wilsons, on the other hand, has lifted its target to $8.38 from $8.07 reflecting a 5% premium to the broker’s fundamental valuation to account for the initial expected accretion from the Delta acquisition. Wilsons continues to view the share price as broadly fair value and retains a Market Weight rating.

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