Is Elders a buy after its -23% post earnings flop?

Shaw and Partners says Elders (ASX: ELD) delivered a very strong FY22 result and the "share price overreaction ignores the solid business the Managing Director has built".

To recap, Elders delivered 39% underlying earnings growth to $232.1m, which was at the top end of its 30-40% guidance. The company also reiterated its target to deliver earnings growth of 5-10% through the agricultural cycle at 15% return on capital.

The positive financial result was overshadowed by the near-term uncertainty created by recent extreme weather conditions and Managing Director Mark Allison's intentions to retire within the next 12 months after almost a decade of leadership at Elders. The two factors triggered a sharp -22.9% selloff for the stock on Monday.

Rating maintained, target price lowered

"Elders is a very well-run company delivering strong results in varied market conditions.," said Shaw and Partners analysts.

"Over the last 8 years, Elder's underlying EBIT has grown by circa 30% pa under Mark’s leadership and ROIC has increased from 11.7% to 26.2%."

The broker reduced its near-term earnings forecasts to take into consideration the weather uncertainty, and lowered its target price from $19.20 to $15.10. A buy rating was retained.

Outlook

"High demand for agricultural commodities is expected to create favourable trading conditions in the first half of FY23," the analysts said.

"However recent extreme rainfall events across the eastern states have created some uncertainty in affected cropping regions and concern about reaching full harvest potential for both summer and winter crops."

In terms of product categories, the broker said:

• Rural products: "Outlook remains positive, with high demand particularity for agricultural chemicals, fertiliser and seed."

• Cattle and sheep: "Prices are expected to soften in the medium term, driven by falls in domestic re-stocker demand, with volumes also balancing out in the short-term."

• Wool market: "Is expected to remain strong, driven by increased demand in China and Europe, pending production conditions ..."

• Real estate: "Strong demand for broadacre properties is expected to continue in the short to medium term, supported by commodity demand and high livestock prices."

Shaw and Partners acknowledged the unknown impact of recent heavy rains plus the overhang created by the Managing Director's pending retirement. The risks were reflected by a reduction in FY23-25 earnings forecasts by 5% to 10% 'to be conservative.'

Elders share price chart