Elders: Expecting a strong FY21 result
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 15 October 2021, 10:00 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Elders (ASX:ELD) will report its FY21 result on 15 November and we expect it will beat consensus. Our new EBIT forecast for 29% growth is underpinned by a larger summer crop, another bumper winter crop, high livestock prices, a buoyant real estate market, full 12 months of the AIRR acquisition and synergy benefits and new bolt-on acquisitions.
- We have upgraded our EBIT forecasts for higher than expected livestock prices, a larger winter crop and new bolt-on acquisitions. However, the resumption of a more normalised P&L tax rate sees our FY22&23 NPAT forecasts fall materially.
- While we rate the ELD business model and management team highly, trading on an FY22F EV/EBITDA multiple of 10.1x, we maintain a Hold rating. We are also cognisant that earnings growth will soon moderate and cattle prices will eventually fall from these record high levels.
Event: FY21 result preview – reports 15 November
ELD hasn’t provided formal FY21 earnings guidance. We had previously assumed that underlying EBIT would be skewed 50/50 1H vs 2H, however given continued record high cattle prices, favourable seasonal conditions and new bolt-on acquisitions, we now expect 2H21 underlying EBIT to beat 1H21.
We forecast FY21 sales to increase 12.7% and underlying EBIT to rise 29.4% to A$156.0m (consensus is A$150.9m). Our underlying NPAT forecast is A$142.3m, up 32.1% on the pcp. We forecast a final dividend of 21.5cps, 20% franked.
Strong earnings growth reflects strong demand for crop inputs due to a significant recovery in the area planted to the summer crop and another bumper winter crop. FY21 includes an extra 1.5 months of the AIRR acquisition and the associated synergies.
ELD has also benefited from record high cattle prices over the period. We note this will be partially offset by tight supply as the national herd rebuilds. Press reports suggest that Real Estate should post strong growth following solid demand for residential/regional/rural properties due to low interest rates, favorable commodity prices and positive seasonal conditions.
We forecast a weak result from Feed & Processing as earnings would have been impacted by rising cattle prices (i.e. higher input costs) which squeeze margins. Corporate costs are expected to rise materially due to AIRR, increased insurance and IT costs, incentives and investment across the group.
We forecast solid cashflow conversion but lower than the pcp which had timing benefits. ELD’s gearing metrics are likely to be well below its target range.
We expect that ELD will reiterate its 8-Point Plan targets of 5-10% EBIT and EPS growth pa through to FY23. Outlook comments regarding the much larger summer
cropping season should be positive for 1H22 and Rural Products demand.
There will also be further backward integration benefits. While we expect ELD to say it is expecting a softening of cattle prices from record high levels as the Australian cattle herd rebuilds, the current prices provide a strong tailwind to the start of FY22.
Favourable seasonal conditions, attractive soft commodity prices and low interest rates should see Real Estate continue to perform well.
With the result we are looking for an update on ELD’s acquisition pipeline, AIRR synergies and back integration strategy and the likely future benefits. We are also interested in the cost of its System Modernisation program.
Reflecting a stronger than expected cattle price, a larger winter crop and new bolt-on acquisitions, we have upgraded our FY21/22/23 EBIT forecasts by 5.5%/5.7%/5.5%. Our new FY22 EBIT forecast is A$168.7m, up 8.1% on FY21. Modelling an effective tax rate of 28% from FY22 onwards (but pays tax from FY24) has seen our FY22 and FY23 NPAT forecasts fall by 23.4% and 23.6%.
While we are expecting a strong FY21 result and earnings tailwinds likely remain in the 1H22, 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 FY22 EV/EBITDA multiple of 10.1x (material premium to peers), we believe ELD is fairly valued.
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