1H18 result – 21% underlying NPAT growth
Ruralco Holdings (RHL) 1H18 result beat our forecast, with underlying NPAT growth of 21%. Revenue rose 7.0% and underlying EBITDA increased by 11.2%. Earnings growth was driven by a full six-month contribution from last year's acquisitions (added A$4.5m to EBITDA), cost control and stronger Rural Services (EBITDA +11%), Water Services (+59%) and Financial Services results.
The result is a commendable performance as RHL was cycling a strong comp which benefited from a solid summer cropping season and record high cattle prices. Given this environment, it was pleasing to see that RHL increased its market share in the cattle industry. As expected, Live Export reported a loss due to tough operating conditions. While the gross profit margin fell, the EBITDA margin rose and ROCE increased to 17.0% from 14.2%. OPEX as a percentage of gross profit surprised on the upside, falling to 78.1% compared to 79.9% in the previous corresponding period (pcp).
The dividend was slightly below our forecast. Cashflow performance was an improvement on the pcp.
We make no major changes to our forecasts
Despite dry conditions and a falling cattle price, 2H18 underlying NPAT is expected to reflect RHL's usual seasonal earnings split (42-46% of the full year). This implies underlying NPAT guidance of A$28.8m-A$30.9m. RHL expects operating expenses as a percentage of gross profit to remain at 78% for the full year. This was better than its original target of 80%. Recent acquisitions are on track to deliver the targeted A$13.6m of EBITDA for the full year.
Following a stronger-than-expected 1H18 result, we have increased our underlying NPAT forecasts by 3.7% for FY18, 3.2% for FY19 and 2.2% for FY20.
Ruralco Holdings (RHL) delivered a solid 1H18 result in less-than-ideal operating conditions. We believe the extent of RHL's discount to peers (FY18F PE of 10.8x vs ELD at 15.8x) is unwarranted, particularly as the company offers one of the highest dividend yields in the sector at 5.2%, fully franked. One could argue that the valuation discount would be even greater if comparable tax rates were used (ELD's tax rate is only 4% due to significant tax losses vs RHL at c31%). We do stress however that we believe ELD has the superior business model.
Based on its relatively attractive valuation metrics, we upgrade our share price target for RHL and maintain our Add recommendation.
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