Growing profits
Shares of agricultural conglomerate Elders (ASX:ELD) doubled in 2017 and are up again slightly year-to-date. Last year’s performance reflected a milestone year for the company, with strong improvements in many key metrics, including a 40% increase in underlying net profit. While it will be tough for the shares to follow up such a strong performance in 2018, the growth momentum in Elder’s business is such that it still appears reasonable value.
Dividends are back on the table and we also like the thematic with the group feeding Asia’s appetite for agricultural products.
Elders benefitted from a tailwind, in the form of higher livestock prices in 2017, along with accretive acquisitions and continued progress in implementing the company’s Eight Point Plan initiatives. Restructuring and cost cutting has seen the ‘turnaround’ story become a reality since we backed the stock in late 2014.
The value of Australia’s agricultural sector hit a record high of $63.7 billion in 2016/17 due to record winter crop production and relatively high prices for livestock, livestock-related and (some) crop products. ‘Soft’ commodity prices and exchange rates are inherently difficult to forecast, but the sector is expected to pull back modestly in 2017/18.
Source: ABARES Agricultural Commodities Outlook September 2017, Elders (ASX:ELD) presentation
While the sector may face a modest headwind near term, we are satisfied that Elders has established a firm base from which to grow, over the past few years, and is a more resilient business. Last year the finalised the cancellation of its hybrid securities, greatly simplifying its capital structure. In the year to September 2017 the key ratios such as leverage, interest cover and gearing, all posted improvements despite net debt increasing by $9.2 million to $95.3 million.
Source: Elders (ASX:ELD) presentation
Since the close of the 2017 fiscal year, Elders has completed the refinancing of its $180 million self-liquidating debtor finance facility with Rabobank, with improved terms for Elders.
The facility lowers Elders finance costs, provides improved flexibility and a reduced administrative burden. The tenor (maturity) of the facility is 12 months.
Mark Allison, the Chief Executive Officer of Elders, who has overseen an impressive turnaround of the business since 2014, said that the refinance “took advantage of continued positive momentum within Elders and provides a strong platform for growth in our Retail business in 2018 and beyond.” He added, “We continue to work hard to reduce cost and improve efficiency throughout the business. This refinance meets both of those objectives.”
Overall, we are content that Elder’s balance sheet is in good shape, paving the way for continued dividends going forward and more accretive acquisition activity to support organic growth initiatives. Cash generation in fiscal 2017 was strong with free cash flow of $78.1 million.
Source: Elders (ASX:ELD) presentation
The strengthening of the balance sheet and improvements in other key metrics in 2017 prompted the company’s Board to reintroduce an ordinary dividend for the first time in nine years. Elders declared a 7.5 cents per share final dividend (fully franked) and supplemented this with a fully franked special dividend of 7.5 cents per share. Going forward, management stated their intention to continue paying ordinary dividends every six months.
The stronger capital position also bodes well for Elders (ASX:ELD) growth outlook.
At the time of the AGM management reiterated that the company would seek to grow and will invest in areas, such as technical and digital services, which are more aligned with the company’s growth agenda the likes of the exited non-core Live Export business.
Agriculture still has plenty of scope to benefit from digital solutions and technology.
CEO Mark Allison referred to the company’s research and development of the Elders Smart Farmer app, which will assist clients in making on-farm decisions via presenting consolidated and aggregated farm data.
In the technical services area, the groundwork for Thomas Elder Consulting (TEC) was undertaken, which will be a premium standalone agronomic fee-for-service business. These types of growth initiatives will be supported by further acquisition activity, with Elders making several bolt-on acquisitions last year.
From now through FY2020, management is targeting up to 5-10% annual growth in EBIT with this coming from a mix of organic growth and acquisitions. Management mentioned that they are eyeing acquisitions in agricultural areas where they have gaps in the portfolio such as the western districts in Victoria and central NSW.
Source: Elders (ASX:ELD) presentation
Turning to the technical picture and looking at the monthly chart, the share price of Elders has traded consistently higher since 2013, underpinned by a rising trend line (upward sloping solid-green line). Above, overhead resistance is situated at the January intra-month high of $8.86 as marked by the horizontal solid-red line. We would expect this level to eventually give-way to the bull camp, and further gains to evolve over the broader horizon. Adding to the bull case is the strength of the underlying long-term uptrend, which has been in place since mid-2014. Coupled with the gradual steepness in gradient of the trend lines (upward sloping green lines) is representative of firm upward momentum in play.
Turning to the daily chart, overhead resistance is situated at the January intra-month high of $8.86 as shown by the horizontal red line. However, it should be noted that the rapid increase in share price has resulted in the RSI to weaken from overbought territory (exhaustion of short-term upward momentum). Hence, should the bears continue to exert downward pressure over the near-term, then a temporary pullback in price could follow down to the 8th January low of $7.99 (horizontal blue line). Positively, should this occur, we would view this temporary pause as both corrective and healthy. Medium-term momentum is in favour of the bulls, as the share price has comfortably cleared both the 50 (red line) and 200 (green line) day moving averages.
Summary
Elders’ FY17 was a milestone year, having made solid progress on their Eight Point Plan initiatives, in addition to accretive acquisitions. Going forward, we believe that the company is well positioned for growth given its strong financial position, the current composition of their portfolio and leaner cost structure.
On the valuation front, Elders’ forward FY18 earnings ratio of 15.6 times is attractive factoring in the company’s growth potential. Returns are also expected to be supplemented by a dividend yield of roughly 1.9 percent going forward.
Elders (ASX:ELD) provides investors with a diversified exposure in the agriculture business via both geography (a footprint in Australia, Indonesia, Vietnam and China) and products (farm supplies, livestock, real estate, wool, grain, financial services, feed & processing and nascent growth areas such as digital and technical services).
With that in mind, we recommend Elders (ASX:ELD) as a high risk buy to Members without exposure and with a medium to long term investment horizon.
Disclosure: Elders (ASX:ELD) is held in the Concentrated Australian Share and Small/Mid-Cap Models.
