Company Overview: Elders Limited (ASX: ELD) is engaged in the provision of farm supplies, fertilisers, wholesale products to farm supplies retailers and is also engaged in the provision of livestock. The company operates under the following reportable segments – Branch Network: provision of a range of products and services through a common distribution channel; Wholesale Products: provides supply to independent retail stores throughout Australia; Feed and Processing Services; and Corporate Services.

ELD Details

Improved Performance Aided by Higher Profitability Across Key Segments: Elders Limited (ASX: ELD) is engaged in the provision of retail products, including farm supplies and associated services to the rural sector. The market capitalisation of the company as on 24 May 2021, stood at ~$1.76 billion. Despite the challenging business conditions due to the outbreak of the COVID-19 pandemic, ELD has delivered a decent performance and reported 12 months rolling Return on Capital (ROC) to be 20.1%, an uptick of 2.1% on the previous corresponding period and above the required hurdle rate of 15%.

In H1FY21, the company posted resilient performance and delivered sales revenue of $1,100.5 million, an increase of ~22% on the previous corresponding period. There has been an improvement in the retail product's margin through higher sales and been aided by the improved seasonal conditions and market growth. The sales growth has also been aided by additional backward integration and improved pricing techniques. The underlying profit after tax grew by ~41% to $67 million during the same period under consideration. The operating cash flow stood at $23.9 million in H1FY21. The management declared a dividend of 20 cents per share in H1FY21, compared to 9 cents per share in H1FY20, on the back of improved financial performance during the given period. The company did not seek any government support, such as the JobKeeper scheme during the half-year ended 31 March 2021.

H1FY21 Financial Performance (Source: Company Reports)

Improved Margin Performance Across Key Verticals: The company reported improved margin performance across most of the business products in H1FY21. Retail Products business unit reported increased margin through higher sales, owing to improved seasonal conditions, as well as synergy from additional backward integration and improved pricing on the products. It recognised an additional $11.9 million in gross margin due to an increase in sales from the Wholesale Products segment. The performance from the Agency Services improved, driven by high prices in livestock. The Real Estate Services segment also witnessed an uptick due to favourable activity in the residential space. The profitability also increased in the Financial Services segment, on the back of decent earnings in its equity investments, as well as interest income received from the company’s new livestock funding project.

H1FY21 Product Margin Performance (Source: Company Reports)

Diversified Reach Across the Country: The company has approximately 500 points of presence in Australia to cater to the needs of the different agricultural regions in the country. It also makes supplies to over 350 sites through its wholesale members. ELD has an opportunity to gain market share by capturing new customers and expanding its offering to existing customers in new geographies through its multi-products and service portfolio.

Favourable Industry Dynamics: Favourable industry momentum augurs well for the company, with the gross value of Australia's agricultural production estimated to be a record $66 billion in 2020-21, driven primarily by the winter crop. The farm exports are also expected to increase in the 2021-22 period, owing to higher cotton, wool and export of dairy products.

Top 10 Shareholders: The top 10 shareholders together form around 28.30% of the total shareholding, while the top 4 constitute the maximum holding. Challenger Managed Investments Ltd. and The Vanguard Group, Inc. are holding a maximum stake in the company at 5.01% and 5.00%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: In H1FY21, the company reported an uptick in net margin performance to 6.3%, compared to 5.9% in the previous corresponding period. There was an improvement in ROE to 9.8% in H1FY21, from a level of 9.4% in H1FY20. There was a slight improvement in the leverage ratio of the company with debt-to-equity ratio at 0.41x in H1FY21, compared to 0.62x in the previous corresponding period. It ended the period with a cash position of $29.6 million as of 31 March 2021, and total debt of $293.5 million during the same period end.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company's line of business exposes it to work-related hazards in regard to the handling of livestock and driving. It is also prone to risk in regard to storage, handling, and transport of chemicals and dangerous goods. ELD is a multi-faceted business unit, and it has to try and retain talented resources for its business profitability and seamless functioning. Any failure of the company to retain key resources might impact the top-line in the medium term. The company is also exposed to the risk of severe weather conditions such as frost, drought, flood, fire, etc., which can influence the demand and supply for rural products.

Outlook: ELD is anticipating an optimistic outlook for winter crop on the back of favourable rainfall events. The continued rainfall has uplifted the sentiments of the farmers, and the company expects decent demand for crop inputs in the second half of FY21. It plans to offset the increase in commodity prices through enhanced pricing techniques and other efficiency measures. It expects to tide over the global supply chain disruptions through mitigating measures like early procurement of inventory. Moreover, it expects high demand for farmland due to a favourable price outlook, low-interest rates and decent seasonal conditions.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company plans to continue on its growth momentum in Insurance and Agri-Finance through marketing activities with partners QBE and Rural Bank. As per ASX, the stock of ELD is trading close to its average 52-weeks’ levels of $9.180-$12.860. The stock of ELD gave a positive return of ~1.94% in the past six months and a positive return of ~7.30% in the past nine months. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average P/E (NTM trading multiple), considering the volatility associated with the COVID-19 pandemic, expected fall in sheep prices in the medium term and challenge in sourcing animals at reasonable prices. For the purpose, we have taken peers such as Inghams Group Ltd (ASX: ING), Select Harvests Ltd (ASX: SHV), Ridley Corporation Ltd (ASX: RIC), to name a few. Considering the expected upside in valuation and current trading levels, impressive financial performance in a difficult period of operations, increase in returns, decent rise in margins across key verticals and a reduction in the debt-to-equity ratio of the company, we recommend a ‘Buy’ rating on the stock at the current market price of $11.010, down by 2.394% as on May 24, 2021. There was a decrease in the stock price mostly due to the stock going ex-dividend on 24 May 2021.  

ELD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Green color lines indicating Support while yellow color lines showing Fibonacci Retracement levels.

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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