Small Caps | May 28 2025
Progress was made since management re-aligned Elders in 2016, but work continues to smooth earnings through the cycle while operating in a highly cyclical and weather dependent industry
-Elders' businesses continue to battle droughts and flooding rains
-Interim result much improved, but below expectations
-Agency business continues to shine
-ACCC decision on Delta purchase imminent
By Danielle Ecuyer
Keeping up with market expectations
Even though Elders ((ELD)) is one of Australia's leading agribusinesses and is sometimes referred to as the "Bunnings of the bush", the risk-adjusted benefits of diversification across asset classes and business divisions couldn't offer the company enough in terms of variable earnings growth in the latest half-year earnings report.
While analysts' responses to the first-half results were mixed, the market was adamant around disappointment with a thumbs down, pushing the share price lower on the day.
Elders took the title of the top 20 biggest percentage loser in the ASX300, down -6.67% on the day of its results announcement, May 26, 2025.
Were the results that bad?
At first glance, the first-half earnings before interest and tax advanced 67% and net profit after tax rose 167%, with earnings margin up to 4.5% against 2.9% in the previous year.
Underlying net profit after tax rose 165% on 1H24, boosted by a lower-than-expected tax rate and lower net interest costs.
Citi notes costs came in above forecasts due to additional bolt-on acquisitions in 1H25.
Return on capital moved higher compared to a year earlier, to 12.7% from 11.4%.
The raw numbers seem impressive but were below expectations, except for Bell Potter.
For example, Macquarie noted, while earnings before tax and interest were up strongly, the result still came in below the analyst's previous forecast by -18%.
In terms of the cashflow, lease-adjusted it came in at $2.9m compared to net cash inflow of $26.2m a year earlier due to the timing on livestock receivables, resulting in a net negative impact on cashflow of -$34.9m.
A $239m capital raising for the proposed acquisition of Delta Agribusiness has supported the balance sheet. Net debt (excluding leases) came in at $279.8m against $356.3m in 1H24, thereby lowering net interest costs.
Adverse weather conditions impact 2Q25
Morgans described the first-half period along the lines of a tale of two quarters, with the first quarter benefiting from normal weather conditions and the second impacted by drought conditions in Victoria (notably the western region) and South Australia, with cyclones in the north of eastern Australia.
The dry conditions in the south resulted in an earnings before interest and tax impact of between -$10m-$15m, a decline of some -11% on a year earlier.
The impact of drought conditions in Vic and SA was double on Crop Protection compared to other regions; SA earnings declined -16%.
The AgChem business, including Crop Protection, as it is referred to, includes herbicides, insecticides, fungicides and pesticides etc., which are applied for improved crop management, horticulture and pasture farming.
The division is part of Elders' Retail Products, which is the largest revenue and earnings contributor, generating in the order of circa 30%-35% of earnings before interest and tax.
Citi believes the upside potential for Crop Protection could exceed the Western Australian experience in FY24, where more positive weather conditions (i.e., rain) can result in a robust pick-up in demand for post-emergent Crop Protection products (those used after crops have germinated), and which are also typically higher margin due to the specific chemistry.
Morgans points to a favourable Bureau of Meteorology rainfall outlook as a potential positive for the upcoming months in the drought-affected regions.
Management suggests the sales foregone in the first half are not canceled but potentially deferred to 2H25, bearing in mind the fiscal year end is September 30, as winter plantings are delayed.
In terms of Crop Protection costs and input pricing from China FOB export values into Australia were higher and fertiliser prices in FY25 are looking at being up 15%-20% on a year earlier, Bell Potter points out.
Real Estate, Agency and Wholesale offer offsets
Offsetting the weakness in AgChem, Elders experienced a higher-than-expected contribution from Real Estate, Agency (livestock, wool brokerage and auctions) and Wholesale.
Macquarie highlights Agency as the "standout", while acquisitions boosted earnings growth in Real Estate and Financial Services. Agency is the largest contributor to earnings before interest and tax at 40%-45%.
The company anticipates ongoing momentum from Agency Services, including an automated wool handling facility, to generate around $4m-$5m in earnings before interest and tax for FY25.
Citi points to an "upswing" in livestock with relatively robust demand, although Macquarie counters there may be some impacts on volumes from South Australian de-stocking.
Bell Potter's estimate for the growth value for cattle turned off --a euphemism for sale of cattle off-farm-- was a rise of 39% on the previous year, and a 44% increase for ovine.
Recent indications in the third quarter suggest ongoing advances of a 9% annual rise for cattle and 20% for ovine.
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