At the time of posting, Elders is at a new low of 26 cents and I am making a case for having a go at catching this falling knife. If you look at some of the other similarly dreadful performers such as Gunns, Bluescope, API and Paperlinx you will see that they have all recently moved up quite strongly in share price. BSL is up around 32 percent from its low a month ago, Gunns has doubled, Paperlinx is up 26 percent and API is up 24 percent in the last few weeks. Only Elders remains in the doldrums. If you check the other threads you will see that I made similar posts to this one at Paperlinx on October 5th when the shares were 6.8c and on API on 11 October when they were 22.5 cents. So I am hoping this will prove to be third time lucky using the same approach. It's Elders time!
A major reason why Elders has been left behind seems to be because one of the largest shareholders, the Sydney fund manager Mathews Capital Partners, appears to have been selling out. I see from the posts on this company that there is some confusion as to who owns what but it does appear as if Mathews Capital is no longer a substantial shareholder. Mathews Capital dabbles in stocks like this that have been, or are, in trouble and I see he has had major holdings in Gunns and Nufarm as well. From the little I have read about this fund so far, Mathews Capital has a major influence on the share price of those stocks such as this one that it gets involved in. I suspect that Matthews Capital is just as likely to turn around and come back in to Elders at these record low prices rather than to leave the company altogether and particularly so, if he sees us little guys coming in and turning it around before he gets the chance to do it on his own. What I have found in these recent forays is that very few investors are prepared to make the first run to the other side. Mathews does appear to be one who does this and this stock is an ideal one for it.
Following my success with PPX and API, I went looking for a similar stock and Elders is the one that I have come up with. Using Comsec’s advanced search facility, I did a search of stocks with current assets greater than $800 million and price/book figures greater than zero (in other words not negative) and less than 1. Here are the first five on the list with their latest figures:
Company ____________ Current Assets___________ Price/Book Ratio
Elders is the only one of this group that hasn’t had a bounce in share price in recent weeks and that is what has brought me here. All five price/book ratios are extraordinarily small. In Elders case you buy a dollar’s worth of assets for 14 cents. Companies selling at such a small fraction of their assets have room to move and adjust when times are tough compared to those that are buried in debt and have nothing to sell. Elders is doing just that by announcing its intention to totally sell up its forestry assets. The proceeds will be used to reduce debt and reinvest in other operations.
Elders annual results are due out on in late November but three weeks ago it released an update. Excluding one off writedowns, Elders has forecast underlying earnings after tax for FY11 of between $1 million and $5 million which I find very encouraging considering such a struggling share price. The 2010/2011 year included the Brisbane floods and was a very tough year for the agricultural industry. At this point in time, 2011/2012 looks much more promising.
Elders forestry assets are currently valued at $523.6 million. That is a massive part of Elders total assets and it seems reasonably to assume that Elders will get a lot more for them than shareholders can currently buy into these assets for. As I pointed out above, you can currently buy a dollars worth of assets for 14 cents by becoming an Elder's shareholder. Surely Elders is going to get a lot better return for its forestry assets than that. Elders total debt at mid year was $386.8 million. If the sale of those forestry assets goes according to plan, Elders will have very little if no debt at the end of this restructure and surely you won’t be able to buy the remaining assets at the bargain price we have available to us right now.
It is not just the assets that look cheap. The market capitalisation of Elders at 26c and based on the ordinary shares alone is a miserable $116.6 million. Elders also has 150 million hybrid shares which currently have a market cap of $58.5 million taking the total market cap to $175.1. The sales revenue in 2010 was over $2 billion so those who are game, are buying into a fairly large company at a very cheap price.
I am taking the punt that a little bit of support at this point in time can result in a rise of 20 percent or more in the share price just to bring it into line with what has happened at those other similar out-of-favour stocks (PPX, API, BSL and GNS). For investors rather than traders, you will get few cheaper opportunities than this one at these prices. The bulk of shareholders all run to the same side of the boat and as I write this, it is somewhat lonely on my side of the boat at Elders. I hope some of you will consider joining me. A trickle can turn to a flood. If you are interested, have a look at my recent posts at PPX and API and you will see what took place following similar posts to this one. It is my view that all it took in those cases was a post like this and a bit of buying support and many shareholders turned and ran back to the other side. Now is my chance to try and prove this theory. I hope you will join me.
GPASAS
ELD Price at posting:
26.5¢ Sentiment: Buy Disclosure: Held
(20min delay)