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Date : 11/09/2020

Elders Limited

ASX :

ELD

Market Cap : $1.56 Billion

Dividend Per Share : $0.09

Dividend Yield : 1.8 %

Buy

52 Week Range : $5.67 - $10.79

Share Price : $10.04

ELD is a well-diversified, financially healthy business that also pays a dividend. Its growth forecasts are positive as the economy and industry recover from the pandemic. Hence, we give this stock a “Buy” recommendation.

Company Analysis

Elders Limited (ELD) is Australia’s largest listed rural services business. They provide agricultural goods and services to primary producers in Australia. ELD was founded in 1839 and now proudly sits as a part of the ASX 200 – a benchmark created by S&P that consists of the top 200 companies in Australia weighted by market capitalisation with a 180-year history behind it.

Elders is superbly diversified in its industry with its product offerings. The table below showcases its products:


Source: Elders Limited

Elders is a very well-run company with a clearly laid out strategy. They are striving to:

  • Deliver increased earnings and reduced capital by improving efficiency of the existing businesses
  • Look for acquisition opportunities to better diversify its offerings in product
  • Fill strategic gaps in geography by expanding businesses
  • Development of an 8-point plan to serve as a guide through to FY23

The firm is run by an experienced management team that is laying out sound strategies and making sure they are implemented in time.

Company Updates

Elders recently refinanced its working capital facilities with a $50m package and a 2-year commitment. Elders’ debtor securitisation program has been increased by $80m with an increase in tenure until December 2021.

The firm’s strategic priorities for FY21 to FY23 has been revealed in the mid-year results presentation.

ELD stock is currently trading close to its 52-week high – suggesting it has recovered from the downturn it experienced early on this year due to the then negative outlook of the entire agriculture industry due to draught and bushfires.

The stock has also reacted to the positive half-yearly financial performance results that were announced.


Source: Tradingview.com

Industry Analysis

The recent draught and devastating forest fires have put a dent on farming in Australia. Reports suggest the draught may finally be over. However, the fickle climate of Australia has always put investors off from the agriculture business. The agriculture industry in Australia has set out an aim to reach the figure of $100m in farm gate production by the end of 2030. This aim has been dented of course. Farmers say its not just draught that affect them now, it is the loss in export market share they have incurred due to the forest fires earlier this year – which lead to decrease in productivity and increase in global competition.
Private capital for the agriculture industry in Australia is hard to come by due to the above reasons. The industry growth rates do not offer much of a risk-reward ratio either – the agriculture productivity growth rates hover around 1% in Australia currently.

These reasons project a grim outlook for the aforementioned aim, and the industry is set to miss out on the $100m production mark by both value and volume.

The winter crop outlook looks brighter with rainfall that has occurred this winter. Covid19 will cast shadows on the recovery of the industry and economy – decrease in demand and the effects on supply chain in particular.

Investment Thesis

The financial statements are a sign of strength for Elders for FY20. Revenues increased by 12% and operating expenses increased by just 4%. There was also a 36% increase in net income compared to FY19.

This is an indicator of a well-diversified stable business that is growing at a reasonable pace in a low growth industry. Elders continues to increase its share of the total addressable market by being able to drive more sales for relatively less money spend on driving those sales. Hard earned exceptional brand names are capable of this, and Elders is the prime example of just that.

The firm also has stable EBITDA margins. This tells us how much cash profit the company makes from its revenues. Stability here means the firm’s operational efficiencies are good. The firm’s strong financial health comes as no surprise as its short-term assets and long-term assets both exceed short-term liabilities and long-term liabilities, respectively.

There has been a change in its capital structure this time around from FY19. The total capital has increased to $997.3m – with debt making up 38% and equity 62%. We believe this increase in debt from previous year’s 17% is not a cause for concern as it is still a healthy mix of debt and equity.
The Return on Equity has increased slightly even though the firm has increased its debt and decreased equity – again suggesting exceptional performance in the financial year.

Elders has paid out a dividend of 18 cents per share at a payout ratio of 22.7%. The firm has maintained this dividend of 18 cents for the past three years now.

Recommendation

A diversified business with excellent management that is consistently delivering on its strategies. Elders is able to keep its margins stable when its revenues are growing, deliver stable dividend payouts, and is in a healthy condition financially. We expect the firm to be able to increase growth further as the economy and industry recovers from the pandemic and also position itself strategically to take advantage of new openings in the market. Hence, we give ELD a “Buy” recommendation.

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