Elders ((ELD)) has proven earnings can still grow despite the severe east coast drought and a declining cattle price. Retail products grew, and the company benefited from acquisitions and higher sheep and wool prices and volumes in FY18.
Management expects to deliver 5-10% growth in operating earnings (EBIT) out to FY20, through acquisitions and organic growth as well as cost controls. Guidance includes average winter cropping forecasts in the second half and implies FY19 EBIT of $78.3-82.1m.
The company expects livestock prices to be subdued although volumes higher, while real estate activity in the broad acre property market remains weak. Elders assumes a reduced summer crop and continued dry conditions will affect fertiliser and crop protection take up.
Net profit growth was greater than earnings growth in FY18 because of lower interest expenses and tax. The company was cycling record high cattle prices, which fell -16% and, in line with the poor winter cropping period, second half earnings dropped -2.0%.
The main negative, however, was operating cash outflows of -$12.1m. This was a lot worse than Morgans expected. The issues are related to timing and cash flow is expected to improve materially in FY19.
The company pointed to higher retail debtors because of a delay in receipts and public holidays at the year-end also affected the result. Around $30m in delayed debtors was received in the first week of October.
Major drivers of earnings and cash flow over 2019-21 are expected to include livestock turnover, with a shift in mix towards sheep, where the company generates a higher commission rate. Wilsons is slightly less positive about lamb/sheep prices, noting the supply/demand dynamic is structurally more favourable than cattle but spot prices are around 50% above the long-term average.
Bell Potter also notes the added benefit of the Kerr & Co acquisition. Further contributions are expected from acquisitions made during the year, including Titan Ag.
Dry Conditions Continue
Inventory remains high because of dry conditions. Initial forecasts are for the summer crop to be down -21%, and Bell Potter also suspects the heightened prospect of El Nino is more likely to result in a dry start to the next winter cropping period.
Given the extent of the east coast drought and the impact on peers, Morgans believes the FY18 results are a commendable outcome, which highlight the strength of the company’s diversified business model. Still, the broker considers the stock fully valued and downgrades to Reduce from Hold. Target is $7.80.
Acquisition Potential
Wilsons also downgrades, to Sell from Hold, with a target of $7.25. Yet, the broker upgrades estimates by 6-7% and expects growth will be sustained as major corporate operators, such as Landmark, Elders and Ruralco ((RHL)), continue to consolidate their share of the rural services market.
This should complement, the broker assesses, modest organic growth driven by market share gains. Nevertheless, seasonal conditions and commodity prices will continue to add volatility to the company’s earnings profile.
Management has identified around $10-15m in opportunities via acquisitions and Bell Potter lifts its targets for expenditure on acquisitions. The broker upgrades estimates for earnings per share by 15% for FY19 by 16% for FY20. This results in upgrade to the target to $7.45 from $6.65.
Bell Potter notes the stock is trading at a material 45-65% premium to its domestic agricultural peer group and, in this light, believes there are more reasonably priced assets in the sector with similar or perhaps greater operating leverage to a recovery in east coast crops. Hence, the broker downgrades to Sell from Hold.
