Elders: Past peak operating conditions?
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 15 November 2022, 7:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Elders (ASX:ELD) reported a strong FY22 earnings result. The combination of favourable operating conditions, strong execution and M&A underpinned 39% EBIT growth. However, cashflow was well below expectations. The strong result was overshadowed by the announcement that ELD’s highly respected CEO will resign within the next 12 months.
- While ELD is targeting earnings growth in FY23, this will be no easy feat given the big FY22 it needs to comp. At this point, we conservatively forecast earnings to decline in FY23 as these ideal conditions potentially start to normalise.
- While ELD is one of the safest ways of gaining exposure to the agricultural industry given its diversified business model, strong management team and conservative balance sheet, we maintain a Hold recommendation as we think the company is past peak operating conditions.
Strong FY22 result with 39.4% EBIT growth; NPAT missed; CF was weak
ELD reported a strong FY22 result, with revenue +35.2% and underlying EBIT +39.4%. This was at the top end of guidance. However, NPAT was up only 0.7% given ELD is now subject to a normal tax rate. Higher minorities, net interest and tax resulted in a NPAT miss. Afinal dividend of 28cps (30% franked) was declared.
Operating cashflow reduced to A$113.7m vs $142.2m in the pcp due to investment in net working capital. Cashflow conversion was 75%, which is well below ELD’s 90% target. Average ND/EBITDA reduced to 1.2x from 1.4x in the pcp.
Bumper conditions all round; earnings growth moderates in 2H
The strong earnings growth reflected strong demand for farm inputs given the larger summer crop and historically large winter crop, record high livestock prices, a buoyant real estate market, market share wins, backward integration benefits and new bolt-on acquisitions.
These conditions saw ELD’s EBIT margin rise to 6.7% from 6.5%. ROC was impressive at 26.2%, up from 22.5% in the pcp.
As expected, EBIT growth materially slowed in the 2H22 vs 1H22 at 7% vs 80%. 2H22 EBIT was A$99.3m compared to A$132.9m in the 1H22, and the EBIT margin also declined to 5.1% vs 6.4% in the pcp, reflecting business mix (strong rural products) and we think reduced backward benefits.
This was still a solid outcome given ELD said that 4Q22 EBIT was down on the pcp by ~A$8m given livestock were held back on feed and in the pcp ELD benefited from early summer cropping sales. We also expect that its performance in July was impacted by the FMD scare.
Targeting further growth; admits matching FY22 EBIT is a massive challenge
ELD said it expects favourable trading conditions to continue in the 1H23 given demand for agricultural commodities remains strong. However, it flagged recent extreme rainfall events across east coast Australia have created some uncertainty in affected cropping regions.
There is concern about reaching full harvest potential for both summer and winter crops.
In regards to FY23, ELD reiterated its 5-10% growth target. We think this will be hard to deliver as ideal operating conditions begin to normalise. We note that consensus has FY23 earnings falling. In the conference, management said that to match FY22 EBIT will be a massive challenge.
Trading in October was slow given the wet conditions may reduce summer crop production in some areas. The adverse weather has also made it difficult to move livestock and prices are lower than the pcp. However, management does believe that through further acquisitions, backward integration and organic growth, earnings growth in FY23 is achievable.
Due to higher corporate costs and lower Feed & Processing earnings, we have reduced our FY23/24/25 EBIT forecast by 1.8%/2.1%/2.3% respectively. Using ABARES FY23 forecast as a guide, we now forecast FY23 EBIT to decrease 3.9% to A$223.1m.
Our downgrades at the NPAT level are more meaningful at 9.1%/10.3%/11.1% respectively, given higher interest, minorities and tax.
While ELD’s multiples don’t appear demanding by any means, given management and earnings uncertainty, we maintain a Hold rating with a new price target of (login to view).
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