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Date : 03/03/2021

Elders Limited

ASX :

ELD

Market Cap : $1.79 Billion

Dividend Per Share : $0.13

Dividend Yield : 1.90 %

Half Sell

52 Week Range : $7.00 - $12.28

Share Price : $11.87

Profit taking opportunity with Elders after an 18% return on a defensive stock with flat growth projections.

Company Analysis

Elders Limited (ASX: ELD) was recommended to our members in September 2020. The stock has returned 18% since then. They are Australia’s largest listed rural services business. They provide financing, banking, real estate, wool, grain, and livestock trading services. Elders is exposed to the export of agricultural products. Elders is essentially a one-stop-shop for everything farming. You can buy raw material from them to farm and then even take their services to sell your produce.


Source: Tradingview.com

China Concern

The agricultural industry is exposed to the deteriorating diplomatic relationship between China and Australia. This has been the major factor in the decline in share price during November and December 2020. However, the stock has recovered all the losses and is once again trading just off its 52-week high following today’s over 3% surge.

Even though Elders’ direct exposure to agricultural exports is slim given the diversification of its services, Australian agricultural prices are highly dependent on export. Close to 20% of Australia’s exports are sent into China, and this poses a threat. Australia’s agricultural exports are not like iron ore. This means that they are easily replaceable.

Elders Outlook

Farmers are known to be setting themselves up for a more resilient future as the recovery from drought has been good. The rain that helped deliver the bumper crop is also behind an expected drop in the value of agricultural exports as livestock producers rebuild herds and flocks and red meat production slows. Exports are forecast to fall 4 per cent to $46.3 billion in 2020-21 due to low slaughter rates and the China trade bans.

Elders management have done a phenomenal job so far. The eight-point plan we mentioned in our initial coverage of the stock was looking to increase gross margins of the products. The execution of the plan is estimated to be completed by 2023. Elders have been very transparent during this time as they have a track record of meeting expectations.

  • The eight-point plan fell short of the 20% underlying return on capital target as it came in at 18.7%
  • EBIT growth target was exceeded however with a 64% year-on-year growth to $120.6 million. This target was exceeded by the acquisition that Elders performed on Australian Independent Rural Retailers.

Our projections for Elders is as rather flat as can be seen in the chart below:

As it stands, there is not much organic growth we are expecting from Elders. Until the eight-point plan is complete, the performance will be rather flat with very low growth rates for revenue. The stock is now trading at 12.6x Enterprise Value/EBITDA multiple – making it a tad bit expensive given that it is in a slow growth phase and the biggest importer of Australia’s agricultural produce (China) has brought in an element of risk

Recommendation

There is really not much to get excited about with Elders. It is the one of the best stocks for exposure to the Australian agriculture market and Elders management has always been right on its game. However, the threat of China’s trade bans and the rather flat growth rates mean that we are recommending a “Half-Sell” by taking some of the profits after an 18% return on a fairly defensive stock.

 

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