Australia's Extreme Weather And Regulations Will Compress Margins

Key Takeaways

• Extreme weather, regulatory pressures, and rising input costs are set to undermine farm profitability, decreasing spending on Elders' products and driving volatile earnings.
  
• Shifting consumer preferences and rapid agri-tech advances threaten Elders' market relevance, sales revenue, and competitive positioning in key agricultural segments.
  
• Operational improvements, diversification, strategic acquisitions, and financial discipline position Elders for stable growth, improved margins, and resilience amid sector cycles and volatility.

Catalysts

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

• Increasing frequency and severity of extreme weather events in Australia is likely to produce ongoing volatility in agricultural output, leading to unpredictable demand for Elders' core rural products and services, which will undermine revenue predictability and result in heightened earnings volatility through the cycle.
  
• Persistently tightening environmental and agricultural regulations, both domestically and internationally, are set to increase compliance costs for Elders and its customers, putting downward pressure on net margins as farmers respond to reduced farm profitability by cutting discretionary spending.
  
• The accelerating global shift toward alternative proteins and plant-based diets threatens to erode long-term demand for Australian livestock and cropping outputs, directly shrinking Elders' addressable market and reducing both agency and product sales revenue over time.
  
• Rapidly advancing agri-tech and digital platforms may outpace Elders' rate of adoption, particularly as global competitors consolidate and capture market share through superior technology, risking persistent margin compression, stagnant earnings, and the possibility of losing relevance in critical segments.
  
• Escalating input prices for fuel, fertilizer, and chemicals are likely to further compress farm profitability, causing farmers to curtail purchases and services from Elders, which will negatively impact both top-line growth and force operating deleverage that erodes net earnings.

Elders Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Elders compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Elders's revenue will grow by 10.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.1% today to 3.4% in 3 years time.
• The bearish analysts expect earnings to reach A$149.1 million (and earnings per share of A$0.66) by about August 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 bearish analyst cohort, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, down from 21.3x today. This future PE is lower than the current PE for the AU Food industry at 23.0x.
• 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 has demonstrated strong execution of transformational projects, such as SysMod, Project Streamline, and supply chain improvements, positioning the company to unlock operational efficiencies and lower costs, which are likely to benefit earnings and net margins over the long term.
  
• The company's continued geographical and product diversification-evidenced by robust performances in livestock, wool, real estate, feed and processing, and financial services-reduces exposure to regional downturns and seasonal variability, supporting stable revenue and earnings growth through agricultural cycles.
  
• Backward integration strategies and targeted bolt-on acquisitions, including the imminent Delta Agribusiness deal, are expected to strengthen Elders' market position, enhance technical and agtech capabilities, and deliver higher-value product offerings, leading to improved margins and sustainable increases in net profit.
  
• Elders' financial discipline, as seen in cost reductions, active working capital management, and maintenance of a solid balance sheet with plans to restore leverage to target ranges, strengthens its ability to weather industry volatility and supports higher return on capital and shareholder returns over time.
  
• The long-term outlook for Australian agriculture remains positive with favorable export demand for protein, technologically driven farm productivity gains, and governmental support for sustainability and biosecurity, all of which support ongoing growth in Elders' core markets, underpinning rising revenue and resilient net income.

Valuation

• The assumed bearish price target for Elders is A$6.04, which represents two standard deviations below the consensus price target of A$8.03. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.1, and the most bearish reporting a price target of just A$5.85.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$4.3 billion, earnings will come to A$149.1 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of A$7.48, the bearish analyst price target of A$6.04 is 23.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.