Global Protein Demand And Digital Transformation Will Fuel Agtech

Key Takeaways

• Digital transformation, automation, and agtech integration are set to drive significant margin expansion and stronger recurring revenue not yet reflected in expectations.
  
• The Delta Ag acquisition and rising global protein demand could position Elders as an industry leader, securing larger contracts and accelerating client acquisition.
  
• Exposure to climate risk, heightened competition, digital disruption, volatile asset values, and rising costs threaten profitability, margin stability, and long-term market share.

Catalysts

Provides agricultural products and services to rural and regional customers primarily in Australia.

• Analysts broadly agree that the benefits from Elders' systems modernization and transformational projects will begin to flow in FY '25, but these impacts could be understated
• with automation, AI integration, and widespread digital adoption, Elders may achieve cost reductions and operational efficiencies that drive net margins and earnings well above current forecasts.
  
• While analyst consensus expects the Delta Ag acquisition to drive revenue and EPS through diversification and synergies, the catalyzed integration of Delta Ag's advanced agtech and technical expertise may position Elders as the clear industry leader, unlocking outsized margin expansion, rapid client acquisition, and substantial revenue upside not reflected in current models.
  
• Elders' digital platforms and agtech investments position the company to capture increasing share of higher-margin precision services as Australian farmers rapidly adopt data-driven agriculture, driving recurring services revenue and improving net margins over the long-term.
  
• Global population growth and surging demand for animal protein, combined with Elders' leadership in automated wool and feed processing, enables outsized growth in agency and processing services revenue as international protein and wool demand accelerates, translating into higher margin and earnings growth than currently priced in.
  
• With governments and corporates accelerating investments to bolster food security and supply chain resilience, Elders' trusted brand, regional reach, and robust supply chain optimization projects are likely to secure disproportionately larger contracts and recurring business, adding multi-year revenue visibility and compressing current valuation discounts.

Elders Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Elders compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Elders's revenue will grow by 16.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.1% today to 3.8% in 3 years time.
• The bullish analysts expect earnings to reach A$194.3 million (and earnings per share of A$0.86) by about September 2028, up from A$67.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 21.8x today. This future PE is greater than the current PE for the AU Food industry at 13.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

Elders Future Earnings Per Share Growth

Risks

• Elders remains heavily exposed to adverse climate events, with the text highlighting significant earnings impacts from droughts in South Australia and Queensland floods, suggesting that increasing climate volatility could disrupt agricultural productivity and directly reduce revenue and margins in future periods.
  
• Rising competition from both large multinational agribusinesses and local traders, especially in crop protection and retail products, is leading to price discounting and margin erosion, which threatens Elders' profitability and could impact future earnings growth.
  
• Elders' business model continues to depend substantially on traditional agency, rural, and retail services, and although management mentions digital transformation through projects like SysMod, there is a risk that technological disruption and the rise of direct farm-to-customer models may reduce the relevance of its core offerings and impede long-term revenue growth and market share retention.
  
• The company's financial results are characterized by ongoing volatility in asset values such as livestock and farmland, with management frequently referencing swings in working capital and earnings due to settlement timing and market cycles, indicating a persistent risk to both net margins and return on equity over the long term.
  
• Elders faces industry headwinds including consolidation among suppliers and increasing regulatory and compliance costs (especially around chemical use and environmental standards), which will likely raise the cost base and depress net margins, while declining rural populations could shrink the future customer base, putting downward pressure on long-term top-line revenue.

Valuation

• The assumed bullish price target for Elders is A$9.45, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Elders's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.45, and the most bearish reporting a price target of just A$5.85.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$5.1 billion, earnings will come to A$194.3 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 6.5%.
• Given the current share price of A$7.66, the bullish analyst price target of A$9.45 is 18.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.