Elders Ltd

Fat Prophets

Tuesday 26th May 2015

Sharechat.co.nz – Hot Stock Elders

Beefing up returns

What’s new?

For the six months ending 31 March 2015, agri-business Elders generated a statutory net profit after tax of $15.9 million, up $26.1 million from the $10.2 million loss in the previous corresponding period. Adjusting for discontinued operations and non-operating items, Elders generated an underlying net profit of $16.2 million, up from $5.0 million in the previous corresponding period, while pre-tax profit increased 3.4 times to $12.1 million.

In terms of the key profit drivers for 1H15, there were four. First, the significant increase in livestock prices on the back of the lower Australian dollar, which boosted export demand. Secondly, better sales outcomes through greater control over Elders’ value chain. Thirdly, productivity gains, particularly with respect to feed and processing costs at Killara. Lastly, the $2.6 million reduction in interest costs.

Looking at Elders’ operating performance by segment, the standout was Agency Services, which was one of the main beneficiaries of higher livestock prices. According to Elders, livestock prices jumped in December 2014 on tighter supply and a lower AUD, with the average price up 26 percent on 1H14. Overall, gains from livestock (price and volume) and wool (volume) more than offset declines from real estate (volume) and grain (volume).

Similar to Agency Services, Elders’ other two strong 1H15 performers were Feed and Processing Services, which increased EBIT by 13 percent on 1H14, and Live Export Services, which increased EBIT by 27.5 percent on 1H14. In both instances, the key driver was the strong demand for beef (i.e. domestic and export markets), which resulted in higher volumes and lower unit costs.

In contrast to Elder’s cattle-related businesses, the performance of the company’s Retail Products (second largest segment by EBIT) and Financial Services were more subdued. Management attributed the ‘flat’ 1H15 results from Retail Products to the dry conditions that prevailed through 1Q15 - importantly, sales improved in 2Q15 as a result of increased rainfall across all regions.

While it is hard to fault a company that delivers a marked improvement in profitability, as Elders has done in 1H15;for it to add meaningful value to shareholders, the increased profitability needs to be matched by commensurate growth in operating cash flows. Business model intricacies aside (i.e. working capital demands), Elders generated a 1H15 operating cash flow of $8.3 million, which compares to an outflow of $11.5 million in 1H14.

In combination with Elders’ reduced debt burden (i.e. net debt of $86.8 million compared to $236.6 million as at 1H14 and $137.6 million as at 2H14), the improved cash flow will enable the company to reinvest in key growth initiatives, as per those detailed in its Eight Point Plan (i.e. FY17 EBIT of $60 million and ROC of 20 percent). As evidenced by Elders’ ROC of 17 percent in 1H15, which compares to 13 percent in 1H14, the company is making progress.

Outlook

Management stated that “positive operating conditions for the remainder of the financial year are anticipated, with encouraging market and seasonal conditions”. In particular, we note the expectation for (i) cattle and sheep prices to remain strong, and demand for feedlot and live export continues to grow, and (ii) average rainfall conditions over the winter cropping season, which should assist the Retail Products segment at the very least.

Price

Elders’ share price has increased by 148 percent over the last 12 months and is now trading around 13.2 times FY15 forecasts. From a technical perspective, while Elders’ share price has been moving in a range with resistance at $3.54 and support currently at $2.04, the outlook recently improved following the break above the 50-day moving average. We expect a breach of the overhead barrier will result in a new leg up for Elders’ share price.

Worth buying?

With debt levels having been reduced substantially and earnings now trending higher, we believe the prospects for a restoration of shareholder value over the medium to longer term remains compelling. While Elders’ share price has outperformed the broader market by around 140 percent over the last 12 months, the current ratio of 13.2 times FY15 earnings continues to offer reasonable value in the context of management’s FY17 earnings targets.

Disclosure: Fat Prophets, and interests associated with the company, hold shares in Elders

Greg Smith is the Head of Research at Fat Prophets share market research and finds management house.

To receive a recent Fat Prophets Report, call 0800 438 328 or Click here.

Comments from our readers

No comments yet