Elders rides expectations on strong tailwinds

Strong tailwinds on multiple fronts have investors and analysts keeping a close watch on agribusiness Elders.

Elders chief executive Mark Allison is focused on delivering above expectations

Agribusiness Elders will outperform on earnings growth boosted by the tailwinds of drought-breaking rain on the east coast, strong livestock activity, prices and better than anticipated synergies with AIRR, analysts say.

Morgans senior analyst Belinda Moore has a “hold” rating on Elders, which beat FY20 expectations and is set to repeat the feat in FY21.

“In the midst of the current market volatility, Elders is performing really strongly on the back of positive seasonal factors as well as better than expected synergies from its AIRR acquisition.

“It is seen as a bit of a safe investment and we can see that in the strong share price growth.”

Bell Potter senior analyst Jonathan Snape also reiterated his ‘buy’ recommendation on Elders, saying consensus earnings forecasts were “too low”.

“The third instalment of Elders’ eight-point plan targets 5-10 per cent per annum growth through to FY23e, or targeted FY23e EBIT of $140-160m.

“On face value, delivery of the upper bound of this target could be achieved through execution on the vertical integration strategy in agchem/vetchem and a normalisation in agency and merchandise drivers.

“Achieving a growth rate in excess of this could be achieved through business investment, something that has featured heavily the past three years.”

He said Elders has invested $284m on acquisitions since 2016.

“The average annual spend has equated to $57m, with around $15m of this in smaller acquisitions in real estate and the branch network.

“If Elders continued to invest at rate of $40-50m annually at 4-5x EBIT (historical average 4.5x) then it would not be unreasonable to expect a further Proforma $25-35m in additional EBIT over the next three years.”

Elders announced its $187m bid for AIRR in July 2019, when its share price was trading around $3.25.

Shares closed at $10.71 on Friday, up 229 per cent since that announcement.

Part of the share price movements can be attributed to significant fund manager moves – Melbourne’s Greencape Capital increased its holding to more than 5 per cent at the end of 2020.

Chief executive Mark Allison said he was focused on the long-term returns.

“The average long-term forecast for Elders share price is $13.60. We hit a peak of $12.26 last year from about 50c six years ago.

“We have a lot of positive seasonal momentum and the business is also diversified to overcome cyclic changes.

“But the market sees that target share price also because of our strong delivery on the return on capital target of 20 per cent and sustained capital discipline.

With 2000 employees and a market capitalisation of $1.7bn, ASX-listed Elders provides livestock, real estate, and wool agency services to primary producers around Australia and NZ and also has a premium meats supply business, Elders Fine Foods, in China.

The China business has a small share of the overall earnings, but Mr Allison reiterated his call to “de-escalate” trading issues with the Asian giant.

“We can have a strong strategic relationship with the US and a strong trading relationship with China without compromising on sovereign issues,” he said.

Elders reported its strongest financial result in a decade in the 12 months to September, a 71 per cent jump in underlying profit after tax to $108m.

Underlying earnings before interest and tax came in at $119.4m, an increase of 62 per cent on FY19 and shareholders were rewarded with a fully-franked final dividend of 13c.