Elders (ELD) shares were one of the few to mount any sort of resistance in yesterday’s massive sell-off on the ASX after it surprised investors with the news it is ending its involvement in the live cattle trade, and produced an ugrade to its 2015-16 profit forecast.
Elders shares ended a difficult day’s trading up 5.1% at $3.68.
Elders, which helped pioneer the live cattle trade, said it will no longer undertake long-haul exports of live animals and is looking to sell its short-haul and air-freight live animal export businesses. The decision is immediate.
Currently, most of Elders’ long-haul business involves sea shipments of dairy and beef breeder cattle to China.
“That business is not producing a return on capital or margins at levels that meets Elders’, or its shareholders’, expectations," Elders told the ASX yesterday.
The news come in the wake of a tighter regulatory environment and losses in the long haul business — which focuses on cattle shipments to China — in the first half. That comes after scandals in the live cattle trade in Indonesia and Vietnam.
Elders said it would continue to operate in the live export industry by finding opportunities for its producer clients and accumulating cattle for exporters.
“A comprehensive review of our live export business has determined that poor margins and capital inefficiency in the long haul business warrant an immediate cessation of that business,” Elders chief executive Mark Allison said.
“While we continue to support our clients who participate in the live export industry, the export, logistics and shipping of live cattle to long haul destinations is no longer central to Elders’ strategy, which was devised when demand for live cattle from foreign markets was key to providing marketing options for Elders’ livestock producer clients.”
Elders’ short haul live export business, which trades as North Australian Cattle Company and sends cattle to Indonesia, Vietnam and Malaysia. But Mr Allison said yesterday the business was now offering only limited long-term growth potential, given the number of competitors.
“The review has also concluded that our short haul sea export of feeder and slaughter cattle to Indonesia, Vietnam and Malaysia has remained viable notwithstanding extremely high Australian cattle prices, which has placed pressure on margins,” Mr Allison said.
“Accordingly, Elders has determined it will continue to conduct that business while preparing it for sale.”
As a result of this decision, Elders says it is expecting underlying earnings to jump up to 24%.
Mr Allison said Elders will now focus on linking beef and dairy producer clients with live exporters and accumulating cattle for exporters. The cost of the divestment and associated restructing would be about $6 million.
But despite that cost, Elders says it still expects earnings before interest and taxes to rise this financial year (which ends on September 30) to a range of $54 million to $57 million, up from $45.8 million in 2015-16.
Elders said that range reflected better than average retail activity due to seasonal conditions, strong livestock prices and solid progress on its "Eight Point Plan" restructuring objectives.
"Conversely, high cattle prices have impacted margins in the feed and processing businesses," the company added.
The company also said after the sale of its export businesses it will have $25 million in working capital to re-invest.
