More forestry write-downs but stock remains cheap The review of Elders? Forestry Assets had lead to a $136.9m reduction to FY10 NPAT, driven largely by balance sheet adjustments totaling negative $133.1m.
These write-downs are in addition to the previously announced $32.4m writedown to Elders' FEA holding. We have reduced our FY10 Underlying EBIT forecast to $78.3m, in line with guidance. Our DCF valuation has reduced to $2.00/s. Whilst these write-downs were larger than expected, we think ELD remains attractively priced relative to our revised price target. We retain our Buy rating.
Forestry Asset review finds issues in Central Queensland The Central Queensland pulpwood plantation has been affected by fungal disease and the review has determined that plantation is unlikely to yield a commercial return. In Esperance, yields are now forecast to be lower than expected due to the impact of lower than expected rainfall. Other property valuations were assessed as reasonable
Earnings Forecast Changes We have reduced our FY10 earnings forecasts to allow for the various Forestry Asset write-downs. We have also reduced our earnings from the Forestry division from FY11 and beyond to allow for the $4.3 million reduction in underlying profit.
Our revised forecasts result in an FY10 underlying EBIT of $78.3 million, in line with the revised company guidance of $78 million.
Valuation & Risks Our DCF valuation has reduced to $2.00 per share from $2.50 per share as the result of our earnings forecast changes and increase in beta. Our main assumptions are a beta of 1.1, risk-free rate of 6.25%, ERP of 6%, WACC of 10.9%, and a terminal growth rate of 3.5% (estimated using GDP). Our price target is based on our DCF valuation and has also reduced to $2.00 per share. The main risk to our forecasts is that the Elders Transformation Program fails to have the desired impact and EBIT margins actually fall rather than increase as we expect. See pages 5-6 for more detail on valuation and risks
Forestry Asset Review leads to more write-downs but already priced in The independent review of Elders? Forestry Assets had lead to a $136.9 million reduction to FY10 NPAT, driven largely by balance sheet adjustments totaling negative $133.1 million.
A comprehensive review of Elders Forestry Assets has found that current property values across the plantation estate are appropriately reflected in Elders? accounts, with the exception of Central Queensland which will be subject to a material write-down. Forecast yields from Central Queensland and Esperance have been reduced materially with a consequent write-down to accrued income attributed to those areas. Yields and property values in other regions (including Albany, the Green Triangle, Bunbury, Kununurra, Tasmania, and North Queensland) are unaffected.
The Central Queensland pulpwood plantation has been affected by fungal disease and the review has determined that plantation is unlikely to yield a commercial return. Elders? management expects that this land will be cleared and sold. In Esperance, yields are now forecast to be lower than expected due to the impact of lower than expected rainfall. Elders? management stated that rainfall in the area has been at around 50% of the average historic levels.
Elders? management has stated that the write-downs will have no material impact on position within financial covenants, which it is meeting and expects to continue to meet. Management also stated that it has sufficient capital to fund the future growth in the business.
We have reduced our earnings forecasts to take into the write-downs to Elders Forestry Assets (see next section). Elders trades at a material discount to our revised $2.00 DCF valuation and we believe that whilst these write-downs were larger than expected, they are already captured in the ELD share price.
We retain our Buy rating given the deep discount ELD trades relative to our revised $2.00 price target.
ELD Price at posting:
59.5¢ Sentiment: Buy Disclosure: Held
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