System Modernization And Killara Feedlot's New Mill Will Boost Operating Efficiency In FY '25

Key Takeaways

• Strategic acquisitions and modernization initiatives are expected to drive revenue growth, improve efficiencies, and enhance market presence.
  
• Focus on backward integration and leverage normalization to boost profit margins and stabilize earnings.
  
• Competitive pricing and high leverage pose risks to financial stability, while relying on future gains from strategic initiatives may pressure current earnings.

Catalysts

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

• Elders' transformation projects, including systems modernization and the new feed mill at the Killara feedlot, are expected to deliver significant benefits in FY '25 and beyond, potentially improving earnings and operating efficiencies. This should in turn boost net margins and earnings.
  
• The acquisition of Delta Ag is expected to enhance Elders’ market presence and provide geographical diversification, which aligns with their growth strategy, ultimately contributing to revenue growth and liquidity. Elders anticipates $12 million in synergies from this acquisition, potentially boosting profit margins and earnings.
  
• Elders' increased focus on backward integration in crop protection products aims to capture higher margins on off-patent products, which should enhance net margins and earnings over time. The target is to raise the backward integration level from 60% to 65% in FY '25, further increasing profitability.
  
• Elders' bolt-on acquisitions, which added $14 million in annualized EBIT, are expected to contribute significantly to financial growth in FY '25, enhancing revenue streams and increasing earnings.
  
• Elders' strategy to normalize leverage and expectations for a return to average seasonal conditions in FY '25 should help stabilize and potentially grow earnings, supported by anticipated improvements in livestock prices and rural products performance.

Elders Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elders's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 3.1% in 3 years time.
• Analysts expect earnings to reach A$113.1 million (and earnings per share of A$0.67) by about February 2028, up from A$45.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$149 million in earnings, and the most bearish expecting A$90.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 30.4x today. This future PE is lower than the current PE for the AU Food industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Elders Future Earnings Per Share Growth

Risks

• Competitive pricing pressure, particularly in key regions like Western Australia and South Australia, could lead to margin leakage, impacting overall revenue and net margins.
  
• The decline in return on capital from 16% in FY '23 to 11.3% in FY '24 due to first-quarter performance and upfront costs for transformation projects may hinder profitability if not efficiently managed.
  
• High leverage at 3.1x, above Elders' target rate of 1.5-2x, driven by acquisitions and net debt increases, could affect financial stability and earnings.
  
• Seasonal conditions and dependency on average weather conditions pose a risk; any deviation may negatively affect livestock prices and rural product sales, impacting revenue.
  
• The reliance on executing the backward integration strategy and systems modernization, with benefits mostly expected in future years, means current earnings might be under pressure until these initiatives prove successful.

Valuation

• The analysts have a consensus price target of A$9.0 for Elders based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.75, and the most bearish reporting a price target of just A$7.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.6 billion, earnings will come to A$113.1 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of A$7.2, the analyst price target of A$9.0 is 20.0% 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.