Having successfully recommended Elders (ASX:ELD) earlier in the year, we recently revisited the investment case in light of recent external developments. With the shares continuing to gain since our recent report in The Dynamic Investor, we consider whether current levels remain an entry opportunity.

About Elders

Elders is one of Australia’s leading agribusinesses, with a national distribution network with over 450 points of presence throughout Australia. ELD’s geographic and product diversification is key strength of the business.

The Company supplies rural farm inputs (e.g. seeds, fertilisers, agricultural chemical and animal health products) and provides agency (livestock, wool and grain marketing), real estate, financial and feed and processing services. Livestock prices and volumes, as well as retail product sales are key earnings drivers and seasonal conditions play a significant role in determining the trend of these drivers.

ELD has a number of reporting segments, the main segments being Retail Products and Agency Services, which together account for 60% of group margin. The Company’s revenue and earnings base have expanded significantly following the acquisition of 100% of the shares in Australian Independent Rural Retailers (AIRR) in July 2019.

Key Fundamental Drivers

Delta Agribusiness Acquisition Awaiting Regulatory Approval

On 18 November 2024, ELD announced an agreement to acquire 100% of Delta Agribusiness (‘Delta’) for an enterprise value of $475m. Delta is an Australian agribusiness with a diversified earnings base, providing rural products and advisory services through a network of 68 locations and approximately 40 independent wholesale customers.

ELD’s completion of its proposed acquisition of Delta Agribusiness is still awaiting clearance from the Australian Competition & Consumer Commission (ACCC). The ACCC has outlined several concerns on the proposed acquisition. The clear downside risk is that the ACCC forces ELD/Delta to divest of branches to ultimately approve the transaction. To this end, the ACCC is very concerned about six stores and has some concern regarding 13 stores. The divestment of branches would result in lost EBIT, but will reduce the acquisition price.

There is a reasonably high probability that the ACCC approves the acquisition. However, the uncertainty around the timing of completion is creating volatility in earnings forecasts for FY26-27. Consensus estimates are not fully factoring in the earnings contribution from Delta (including the expected synergies from the acquisition) until formal ACCC clearance is received.

In the event that the acquisition doesn’t go ahead, ELD may return some of the $246m raised via equity to fund the transaction to shareholders through capital management initiatives. These include a capital return or a share buyback. Alternatively, the unused funds could be used to reduce gearing levels, which was 2.7x as at 31 March 2025 and above ELD’s target range of 1.5-2.0x.

System Modernisation to Improve Pricing Power & Margin

ELD is rolling out new systems which should yield multiple benefits. These include an enhanced customer experience (greater sales), efficiency benefits (will lower cost to serve, capture more rebates, and increase margins) and inventory/working capital benefits.

Further, ELD will have greater pricing discipline across its network. This includes centralised pricing and more limited discretion over what a branch can charge.

Seasonal Conditions Remain Favourable

Cattle prices have continued to increase despite increased supply. This is because cattle are continuing to come to market with strong demand from processors across the country.

There has also been a material uplift in crop input values, in particular urea, Diammonium Phosphate (DAP) and glyphosate tech. In context, a substantial portion of ELD’s revenue is generated from the sale of crop inputs like fertilisers, crop protection chemicals, and seeds. Higher sales value for crop protection products is expected to result in a lift in the underlying EBIT margin. For the six months to 31 March 2025 (1H25), ELD reported lower sales from crop protection, which dragged the underlying EBIT margin lower, to 4.5%.

Improved rainfall also provides upside risk to EBIT margin. To this end, recent rainfall has seen soil moisture profiles recover, and the three-month rainfall outlooks have improved. The Bureau of Meteorology’s latest rainfall outlook forecasts a 75-80% chance that rainfall will be above average across cropping regions in Queensland, NSW, northern Victoria and SA.

Fundamental View

The re-rating in the shares now sees ELD trading on a 1-year forward P/E multiple of ~12.5x. This multiple is broadly in line with the average over the last two years of ~12x and below the middle of the trading range over the last two years. The current multiple remains undemanding in the context of an EPS growth profile of 18% over FY24-27 on a CAGR basis. The strong EPS growth profile over the medium term is underpinned by: i) Margin expansion from the backward integration strategy and the Systems Modernisation spend, ii) Annualised contribution from 1H25 acquisitions and iii) Non-recurrence of the SA drought.

Further, there remains upside to EPS growth estimates from ACCC approval of the Delta transaction.

Charting View

ELD has been trading well since the April low. There was a resistance zone near $7.50 where the stock was, until recently, unable to overcome. However, we finally got a decisive break last week (circled) and in the past few days the shares have been consolidating. This means we still have a buying opportunity here before the stock runs too far.

 

Michael Gable is managing director of Fairmont Equities.

 

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