Elders: Delivers the cash and earnings

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
18 November 2020, 2:00 PM
Sectors Covered:
Agriculture, Food & Beverage, Travel

  • On all measures, Elders' (ASX:ELD) result beat our forecast, delivering impressive growth.
  • We have increased our forecasts with FY21 expected to be another good year given ELD will benefit from improved summer cropping conditions, a full 12 months of the AIRR acquisition and synergies and recent bolt-ons.
  • While we rate the ELD business model and management team highly, trading on an FY21F EV/EBITDA multiple of 11.3x, we maintain a Hold rating.

FY20 result beats our expectations by 8%

Elders' (ASX:ELD) FY20 result was above our forecast and consensus. Underlying EBIT (pre AASB 16) rose 62% to A$119.4m (Morgans was A$110.3m and consensus was A$112.1m) and underlying NPAT was up 71% to A$109.0m. FY20 benefited from improved seasonal conditions from the 2Q which led to strong demand for farm inputs and materially higher livestock prices.

The result included a 10.5-month contribution from the AIRR acquisition (EBIT of A$21.9m) and was supported by stronger than expected performances from the Livestock in Transit (LIT) and Titan acquisitions.

In FY20 ELD made solid progress with its backward integration strategy, selling more of its own branded products at higher margins. The material improvement in cashflow generation was a key highlight of the result. The balance sheet is strong and is well placed to fund further bolt-on acquisitions.

FY21 outlook is positive

No formal FY21 guidance was provided. However management said that FY21 is off to a solid start. Overall, ELD said that the outlook for its business is generally positive across the board. Demand for crop protection and fertiliser is expected to increase due to a significant recovery in the area planted to the summer crop following recent rainfall. Margin is also expected to benefit from the backward integration of AIRR and Titan Ag.

In FY21, ELD will benefit from a further 1.5 months of its AIRR acquisition. Positively, management said it is on track to exceed the A$8m mid-point of its synergy target. ELD will also benefit from the bolt-on acquisitions made in FY20. Livestock prices (cattle, sheep, wool) are expected to fall. Demand for farmland is expected to remain high. Livestock financing is expected to grow and further upside is expected from LIT.

Its Killara feedlot is expected to face challenges in sourcing animals at reasonable prices and the necessary volumes to service export markets. Group costs will increase in line with footprint growth, continued investment in its 8 Point Plan and the first phase of its System Modernisation program. Importantly, strong cashflow is again targeted in FY21.

Third 8 Point Plan announced; we upgrade our forecasts

ELD has released its third 8 Point Plan which targets 5-10% EBIT and EPS growth pa through to FY23 and a ROC of 15%. This implies EBIT (pre AASB16) of A$138.2-158.9m in FY23. Near-term growth is expected to be generated via delivering the remaining AIRR synergies and the execution of its backward integration strategy for sales of its crop protection and animal health products.

Due to better than expected summer cropping conditions, success with its backward integration strategy and new 8 Point Plan targets, we have increased our FY21/22/23 NPAT forecasts by 5.7%/7.8%/9.7% respectively. Growth in FY21 reflects a full year of AIRR and the targeted synergies (we assume A$9.5m), recent bolt-ons (A$5.0m) and improved summer cropping conditions (+A$7m).

Investment view – Hold rating and updated price target

The outlook for ELD remains positive however we keep a watching brief on livestock prices which are currently at historical highs. Trading on an EV/EBITDA multiple of 11.3x FY21F, we believe ELD is fairly valued.

We maintain a Hold rating with an increased price target (login to view updated price target) A$10.20 previously. The main upside risks to our view is if earnings surprise on the upside given its favourable outlook and/or ELD makes a highly accretive acquisition. The key downside risk is a material fall in the cattle price.

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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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