Elders: How much longer can this cycle go for?

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
15 March 2022, 10:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • FY22 EBIT guidance was materially ahead of consensus expectations. 20-30% growth will be driven from leveraging favourable seasonal conditions, strong livestock pricing, buoyant real estate market conditions, executing its backward integration strategy and further bolt-on acquisitions.
  • We have made material upgrades to our FY22 forecasts. However, we forecast a flat 2H and for earnings to decline in FY23 as these ideal conditions start to normalise.
  • While we rate the Elders (ASX:ELD) business model and management team highly, trading on an FY22F EV/EBITDA multiple of 8.8x, we maintain a Hold rating. We are also cognisant that earnings growth will moderate from the 2H22 and cattle prices will eventually fall from these record high levels. Our new price target is (login to view).

Event: mid-point of FY22 EBIT guidance is 15.8% ahead of consensus

ELD expects FY22 underlying EBIT to be up 20-30% on the pcp in the range of A$199.8-216.4m. The midpoint of guidance (A$208.1m) was 13.5% above our previous forecast of A$183.3m and 15.8% above consensus of A$179.7m. NPAT growth will be materially less than EBIT growth given ELD’s P&L now incurs the normal company tax rate (was previously 1% given it tax losses).

Analysis: bumper conditions all round

Retail and Wholesale division has benefited from favourable seasonal conditions.

The summer cropping season was materially bigger than the pcp (planting was up 48%). The near term rainfall outlook means there should be a large upcoming winter cropping season (but note ELD is comping a big pcp). ELD has sold plenty of seed, ag chem, fertiliser etc to farmers and at significantly higher prices.

The Agency business is performing strongly due to record high livestock prices. This is being partially offset by lower volumes due to restocking and the good availability of feed on farm.

Real Estate is also exceeding expectations due to increased turnover and high demand given low interest rates, favourable commodity prices and positive seasonal conditions.

Additionally, ELD is benefiting from market share wins, backward integration benefits and new acquisitions.

Outlook: are conditions in FY22 as good as they get?

According to ABARES, in FY23, the value of Australian crop production is forecast to fall 6% to A$76bn, which is still the second highest on record. ABARES said that the FY22 La Niña appears to have peaked or is near its peak. Neutral climatic conditions are now more likely in the current 10-month forecast window, with La Niña conditions less likely to persist in FY23. Cattle herd rebuilding momentum is likely to slow in FY23, resulting in higher production and falling prices.

Forecast changes

Reflecting ELD’s stronger than expected guidance, we have upgraded our FY22/23/24 EBIT forecasts by 17.4%/2.4%/2.4%. Our new FY22 EBIT forecast is at the top end of guidance at A$215.2m, up 29% on FY21.

Given ELD is cycling a bumper winter cropping season in the pcp and noting that some sales have been pulled forward to the 1H, we forecast 2H22 EBIT of A$93.9m, up 1% on the pcp. Using ABARES FY23 forecasts as a guide, we forecast FY23 EBIT to decrease 7.0% to A$200.1m.

We note that ELD is likely to target further growth in FY23 from further backward integration benefits, a full year of the FY22 acquisitions and new acquisitions, cost efficiencies and benefits from its systems modernisation.

ELD will report its 1H22 result on 23 May. Our underlying EBIT forecast is A$121.3m, up 64% on the pcp. We forecast the 1H22 EBIT margin to increase to 7.7% from 6.7% in the pcp reflecting increased volumes, higher prices, improved business mix and backward integration benefits.

Due to a higher tax rate and minorities, our NPAT forecast of A$82.2m, is only up 23% the pcp. We forecast an interim dividend of 26cps unfranked, up from 20cps the pcp.

Investment view – Hold rating 

While earnings tailwinds will likely remain in the near term, at some point seasonal conditions and livestock prices will revert which may place pressure on ELD’s earnings growth targets and share price in the absence of a large acquisition. Trading on an FY22F EV/EBITDA multiple of 8.8x (premium to peers), we believe ELD is fairly valued.

Following forecast upgrades, our blended valuation has risen to (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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