1H17 result was materially better-than-expected
Elders reported a better-than-expected result, with strong gains seen in underlying EBIT (+47% to A$41.3m) and NPAT (+54% to A$34.9m). 62% of EBIT growth was via organic means, while 38% came from acquisitions, which highlights the strength of the result. The Australian Network was the highlight (EBIT growth of 35%), benefiting from the first decent summer cropping season in years, high livestock prices and recent acquisitions. Feed & Processing reported a flat result given higher livestock prices are a headwind.
Corporate overheads rose with a need to accrue the long term incentive program. Net debt increased as a result of greater working capital, new acquisitions and post ELD buying back the hybrid. ELD will declare a dividend with the full year result in November.
Return On Capital (ROC) was an impressive 30.2% and was well ahead of ELD's 20% target.
FY17 guidance is upgraded; now focused on 2020 growth plan
ELD has upgraded FY17 EBIT guidance to A$66m from A$60m previously. Based on ELD's usual season earnings skew, we believe that new guidance could prove conservative. We recognise management's conservative approach to setting 2H17 expectations is prudent given the prospect of livestock prices falling, below average seasonal conditions and the materially higher corporate costs it will incur as it beats its targets.
Our FY17 NPAT forecast has risen 6.4%. ELD is now firmly focused on its path to sustainable earnings growth out to 2020. ELD is targeting 5-10% EBIT growth pa which should deliver an EBIT of over A$80m by FY20. This new target takes into account materially lower livestock prices.
We believe ELD is undervalued trading on an FY17F PE of only 9.9x. While there may be some concern that ELD will find it difficult to offset the tailwind provided by record high livestock prices in recent years, we highlight that ELD has a diversified business model by geography and sector. Other areas of the business can offset any potential weakness in livestock prices. Over the last couple of years, some sectors haven't performed as well as they could. Growth will also be supplemented by further accretive bolt-on acquisitions and ELD has a pipeline of targets. We also expect that ELD will continue to win market share.
We are willing to back this management team which has delivered solid earnings growth and has always surprised on the upside. We retain our Add recommendation with an upgraded share price target.
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Disclaimer(s): Analyst owns shares.
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