Agribusiness company Elders ((ELD)) is successfully integrating several acquisitions while facing a much better summer crop outlook. FY20 results revealed improved winter cropping activity and stronger livestock prices while capital intensity, particularly in retail products, continues to increase.
Morgans was impressed with the growth, as underlying earnings (EBIT) rose 62% and underlying net profit 71%. The company has made progress in selling more of its own branded products and the broker highlights a material improvement in cash flow.
Wilsons found the outlook more mixed, as while summer cropping activity should improve livestock prices are likely to be lower and costs increase. While encouraged by the improvement in cash conversion, the broker considers the valuation full and the risk/reward bias to the downside, retaining an Underweight rating and $8.57 target.
No formal guidance was provided but Elders expects demand for crop protection and fertiliser to increase because of a significant recovery in the area planted to the summer crop.
Seasonal conditions improved from the second quarter of FY20 and this led to strong demand for farm inputs and higher livestock prices. The results include ten months of contribution from the company’s AIRR acquisition, supported by stronger performances from livestock in Transit and Titan.
Gross margins grew across all states and products, which were combined with continued cost control and discipline on capital, Macquarie observes, and the turnaround in seasonal conditions has set up a favourable outlook.
Rural products were also ahead of expectations in FY20, despite some areas still being in drought. The broker expects the earnings impact from the poor summer crop in the first half will be reversed in FY21, particularly if irrigated cotton continues to improve.
The company is targeting 5-10% growth in earnings through the cycle at a 15% return on capital. Macquarie expects 10% compound growth in earnings between FY21-23, noting a solid track record since the the first 8-point plan was implemented in 2014 that returned Elders to a pure agribusiness.
Bell Potter adds that over the last six years Elders has delivered compound growth of around 24% and believes there is ample room for more strategic acquisitions. Moreover, expanding the service offering should in turn drive gross margin expansion through optimised pricing and supply chain efficiencies.
Acquisitions
The acquisition of AIRR for $187m a year ago has exceeded expectations and Macquarie suspects Elders will beat the mid point of $6.6-9.3m in expected synergies by next year, retaining an Outperform rating and $13.98 target.
Bell Potter agrees the annualised benefit of recent acquisitions along with the continued migration of generic veterinary and agricultural chemical sales to Titan and AIRR will be key contributors to growth in the next few years.
The broker estimates the annual combined sales of Elders and AIRR across agricultural and veterinary chemicals is $580-650m. Potential margin expansion can occur with the transition of AIRR registrations and areas of the Elders portfolio to Titan and converting Elders veterinary chemicals sales to the AIRR portfolio.
Bell Potter calculates scope to capture $30-40m in gross margin leakage through consolidating generic portfolios, which it does not perceive is the view adopted in consensus estimates.
There is scope to contribute an extra $9-11m to earnings in FY21 from a combination of the summer crop and the annualised benefit of acquisitions, the broker adds. Gains in market share have accelerated in livestock agency, wholesale and fertiliser in particular.
This is the cornerstone of the company’s revised 8-point plan and, indicative of the upside. Bell Potter notes Titan revenue almost doubled in FY20 and retains a Buy rating with a $13.30 target.
Livestock
The main upside risk could come from further improvement in the cropping outlook and/or an accretive acquisition, Morgans agrees, while keeping a close eye on livestock prices and believing Elders is fairly valued, retaining a Hold rating and $11.68 target.
On the downside, cattle prices are expected to ease back from record highs in FY20 although Macquarie expects this should be offset by improved volumes. Sheep prices are also forecast to fall amid reduced demand and disrupted global supply chains. This could mean wool prices are under pressure in the near term.
The Killara feedlot is expected to have difficulty sourcing animals at reasonable prices and the necessarily volume to service export markets. Bell Potter assesses Elders has gained market share amid growth in the number of sheep and cattle handled in FY20 against the backdrop of a market herd that was down -5-10%.
