-Growth for rural and wholesale products were highlights
-Market conditions and organic growth lift margins
-FY22 guidance appears conservative
-Hold-rated Morgans and Bell Potter invoke some caution<\/strong><\/p>\n
By Mark Woodruff<\/p>\n
Despite a share price trading at 52-week highs, brokers continue to set even higher 12-month target prices for Elders ((ELD)) following first half results.<\/p>\n
Underlying earnings (EBIT) rose 80% for the half, a 36% beat compared to the consensus estimate<\/strong> for the provider of financial, real estate and agricultural services to rural Australia. Meanwhile, profit of $91m exceeded the consensus forecast for 65m.<\/p>\n The result was driven by a combination of market and seasonal factors, and both acquisitive and organic growth, observes Macquarie. Rural and Wholesale products were considered the standout<\/strong> with growth driven by strong demand for fertiliser and crop protection products following a favourable season.<\/p>\n All regions delivered growth highlighting to the analyst a diversification of earnings that serves to reduce risk. NSW was the top performer in delivering 103% earnings growth versus the previous corresponding period (pcp).<\/p>\n The gross margin for the Rural Products division improved by 1.2%, while Agency Services benefited from high livestock prices, which more than offset lower volumes. Meanwhile, growth in Real Estate and Financial Services was driven by strong market conditions.<\/p>\n Overall, the company attributed 42% of first half gross margin growth to those strong market conditions, with the balance derived from organic growth (46%) and acquisitions (12%).<\/strong><\/p>\n Despite higher working capital to support growth, Macquarie highlights a 27.8% return on capital (ROC) compared to a company target of 15% set following the Australian Independent Rural Retailers acquisition in July of 2019.<\/p>\n Management declared an interim dividend of 28cps (30% franked) and upgraded FY22 earnings growth guidance to 30-40% above the pcp, compared to prior guidance for 20-30%. The company is also optimistic about growth in FY23.<\/p>\n Nonetheless, some brokers introduced a note of caution. While Morgans raises its target price to $14.75 from $13.50, a Hold rating is kept as earnings growth should moderate from FY23 and cattle prices will eventually fall from current record high levels. The Hold-rated Bell Potter also reminds investors of tailwinds that have materially assisted since FY19.<\/p>\n Guidance<\/u><\/p>\n Management’s FY22 guidance reflects an element of conservatism, according to Macquarie, as the top end of the range implies a 57\/43 first half\/second half earnings skew compared to the historical 45\/55 spilt.<\/p>\n The broker retains its Outperform rating and raises its target price to $16.54 from $15.15.<\/p>\n In raising its target price to $15.50 from $13.90, Bell Potter agrees and points out the upper end of guidance implies 8% year-on-year growth in second half earnings. This is considered modest when current tailwinds for fertiliser and agricultural-chemical prices, as well as livestock turnover are taken into account.<\/p>\n As good as it gets?<\/u><\/p>\n Goldman Sachs feels there is a misconception among investors that this is as good as it gets. <\/p>\n The analyst disagrees as Elders is well-positioned to deliver sustainable earnings growth over the medium term and notes management is committed to delivering further 5-10% earnings growth in FY23.<\/p>\n More than 50% of the growth reported in the first half reflected ongoing execution of the company’s strategy, according to the broker. It’s thought ongoing medium-term organic growth should arise from market share growth and margin expansion from a backward integration strategy that is only around 50% complete.<\/p>\n Goldman Sachs continues to be attracted to management’s strong track record and a good overall industry structure and raises its target price by 14% to $21. An attractive valuation and potential for a positive earnings surprise are also considered to support a Buy rating.<\/p>\n Meanwhile, Buy-rated Shaw and Partners lifts its target to $20 from $16.50 and points to a strong upcoming winter cropping season (based upon April 2022 Bureau of Meteorology rainfall data) that should benefit the company in both FY22 and FY23.<\/p>\n Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n![](\"https:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/Commodities\/Agriculture\/agriculture%20spray%20fertiliser.jpg\")
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