Elders: Still in the upgrade cycle

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

24 May 2022, 9:25 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• Elders (ASX:ELD) reported a strong 1H22 result which was a material beat compared to consensus. The combination of favourable operating conditions, strong execution and M&A underpinned 80% EBIT growth.
• Given ELD's upgraded FY22 earnings guidance, we have made material changes to our forecasts. We forecast EBIT growth of 8% in the 2H22 compared to the pcp and for earnings to decline in FY23 as these ideal conditions start to normalise.
• While we rate the ELD business model and management team highly, trading on an FY22F EV/EBITDA multiple of 9.3x, we maintain a Hold rating. We are also cognisant that earnings growth will moderate from FY23 and cattle prices will eventually fall from these record high levels. Our new price target is available for Morgans clients only.

Event: Strong 1H22 result

ELD reported a strong 1H22 result, with revenue +38%, underlying EBIT +80% and NPAT was up 34%. This beat Morgans EBIT forecast by 9.5% and consensus by 36%. An interim dividend of 28cps, partially franked was declared.

Analysis: bumper conditions all round

The strong earnings growth reflected strong demand for farm inputs given the larger summer crop, positive outlook for a large upcoming winter crop, record high livestock prices, a buoyant real estate market, market share wins, backward integration benefits and new bolt-on acquisitions.

Materially higher prices, business mix and backward integration benefits saw ELD's EBIT margin rise to 8.8% from 6.7%. ROC was impressive at 27.8%, up from 20.1% in the pcp.

ELD specifically said that 12% of growth was due to acquisitions, 46% was delivered by organic means and 42% reflected favourable market tailwinds.

Operating cashflow was an outflow of A$55.5m vs an inflow of A$23.9m the pcp. This was broadly in line with our expectations and ELD's guidance around holding higher inventory given higher priced stock. ELD is targeting 90% cashflow conversion for the full year.

Average ND/EBITDA reduced to 1.2x from 1.8x in the pcp and was below ELD's target of 1.5-2.0x.

Outlook commentary remains upbeat; FY22 guidance is upgraded

ELD upgraded its FY22 underlying EBIT guidance to be in the range of A$216.4-233.1m, up 30-40% on the pcp. Previously it was targeting 20-30% growth. Guidance at the mid-point implies 2H22 EBIT of A$91.9m vs A$92.7m in the pcp, implying that earnings will be materially skewed to the 1H (~57%), compared to ~45% in recent years.

ELD is actively managing its margins given some of its product prices are now starting to fall.

ELD said its strong 1H performance has continued in April. ELD expects to benefit from a positive winter cropping outlook in the 2H. Livestock prices are expected to remain high (albeit they have fallen from recent highs), benefitting the Agency business and offsetting anticipated lower volumes from feed availability and restocking.

Real Estate Services is expected to continue to outperform vs the pcp.

We upgrade our forecasts

Reflecting ELD's upgraded guidance, we have upgraded our FY22/23/24 EBIT forecasts by 8.3%/13.5%/13.3%. Our new FY22 EBIT forecast is at the top end of guidance at A$233m, up 80% on FY21.

However, NPAT is up only 5% given ELD is now subject to a normal tax rate. Even though ELD is cycling a bumper winter cropping season in the pcp and some sales have been pulled forward to the 1H, we forecast 2H22 EBIT of A$100.2m, up 8.1% on the pcp.

Using ABARES FY23 forecasts as a guide, we forecast FY23 EBIT to decrease 2.5% to A$227.2m.

In FY23, despite our assumption that seasonal conditions normalise, we think the resulting lost earnings will be largely offset by further backward integration benefits, a full year of the FY22 acquisitions and new acquisitions, cost efficiencies and benefits from its systems modernisation.

Investment view – Hold rating and new price target

While earnings tailwinds will likely remain in the near term, 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 FY22F EV/EBITDA multiple of 9.3x (premium to peers), we believe ELD is fairly valued. Following forecast upgrades, our blended valuation has risen (clients login to view).

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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.