Despite strong earnings, Elders tanks after flagging La Nina impact: CEO to exit

Elders (ASX: ELD) opened -15.70 lower after the Australian agricultural business announced a 39% jump in annual underlying earnings to $232.1m on the back of $3.4bn in sales, up 35%.

At face value, the market had little to dislike about Elders full year to 30 September result, which benefitted from strong demand and favourable growing conditions for its rural customers.

Strong underlying result

In addition to declaring total dividends for the year of 56 cents partially franked (30%), compared to 42 cents partially franked (20%) in the previous year, the group delivered return on capital (ROC) of 26.2%, up 3.7% on FY21, and significantly exceeded the company’s 15% hurdle set in its Eight Point Plan strategy.

The company also guided to earnings (EBIT) growth of between 5% and 10% for FY23.

Due to a continued focus on the backward integration strategy, while capturing the benefits of strong seasonal conditions, gross margin of $383.1m, was also up 35% on FY21.

Growth through (13) strategic acquisitions continued in FY22 and delivered full year earnings (EBIT) of $12.6m in FY22.

“Geographical and product diversity enabled Elders to overcome headwinds from localised unfavourable weather events in many regions, while supply chain efficiency initiatives and our backward integration strategy continue to support margin growth,” the company noted.

Full year FY22 highlights also included

• Net profit up 9% to $162.9m

• Dividends up 33.3% year-on-year

• Real Estate Services gross margin was $61.6m, up 21% on FY21

• Net debt stood at $284.9m, up $68m on the prior year

CEO to exit

But what the market appears to have taken issue with this morning were plans by longstanding CEO Mark Allison to step down on or before November 2023.

After completing what will have been ten years of leadership at Elders as chair, executive chair and, since May 2014, as CEO, management notes the timing of Allison’s exit is right, and will allow for a smooth transition and leadership refresh for Elders' next phase of growth.

Heightened uncertainty

What’s also playing on investors’ minds this morning is heightened uncertainty.

While high demand for agricultural commodities is expected to create favourable trading conditions in the first half of FY23, management notes recent extreme rainfall events across the eastern states have created some uncertainty in affected cropping regions.

As a result, it’s unclear whether full harvest potential for both summer and winter crops can be reached.

While the rural products outlook remains positive - with high demand particularly for agricultural chemicals, fertiliser and seed - the industry is yet to realign expectations for the FY23 season once the fuller impacts of the extreme wet conditions and flood events are assessed.

While the wool market is expected to remain strong, driven by increased demand in China and Europe, cattle and sheep prices are expected to soften in the medium term, driven by falls in domestic re-stocker demand.

What brokers think

Elders share price is down -2.3% over one year but has been trending higher since hitting a year-to-date low of $11.12 late July.

Consensus on Elders is Buy.

Based on Morningstar’s fair value of $14.14 the stock appears to be undervalued.

Macquarie trimmed Elders FY22 earning per share (EPS) forecast by -3.6% ahead of today’s result, to better reflect the impact of wet weather on the east coast, which the broker suspects is likely to push some FY22 sales into FY23.

Macquarie also expects to see a sharply lower cash conversion, which the broker expects will correct in FY23 following ABARES’ forecasted 7% uptick in the value of farm production over the period.

The broker retains an Outperform rating, target price eases to $16.40 from $16.54.

Elders Ltd share price over 12 months.