Looking At Elders Anew FNArena News - September 09 2009
By Andrew Nelson
Elders Limited (ELD), or what we used to call Futuris Corporation, is one of Australia's largest rural services companies. However, Elders, and the rural services industry has seen some pretty tough times over the past two years, as have managed investment schemes and the automotive sector, which are two of the group's other key segments. However, with an improving outlook, moves to address a stretched balance sheet undertaken and a strategic review in progress, some renewed interest in Elders among the Australian stockbroker community is emerging.
There's no doubting the volatile conditions over the last few years due to the dry conditions in eastern Australia and volatile fertilizer prices. Combined with an excessive amount of debt, these elements have taken their toll on the stock. But the company's new management team has moved to restructure the business, sell non-core assets and raise a large amount of capital in order to help fix the balance sheet.
And it's the confirmation of this capital raising and a clearer picture of a new, de-leveraged Elders that has piqued the interest of analysts at Deutsche Bank, who yesterday resumed coverage of the stock.
The broker notes that Elders has traditionally run with a significant level of debt. In fact, net debt as at 30 June 2009 was approximately $1bn compared to a market capitalization of around $300m. Tough trading conditions aside, the broker blames this high level of gearing as being the main factor that made the company difficult to manage (and invest in) over the last few years.
The company has moved to reduce its debt levels, primarily by selling off 10% of its 50% joint venture in Elders Rural Bank to Bendigo and Adelaide Bank, who own the other 50% and more recently, by undertaking a large capital raising. All up, Elders raised $475m in new capital via an underwritten placement at $0.15, with $75m more to be raised if the share purchase plan is fully subscribed. Although, this is still to be approved by an EGM in mid-October.
The moves have Deutsche thinking the company's debt issues are pretty much resolved, with pro-forma net debt falling to just $178 million on its forecasts. Deutsche thinks this will be a much more manageable level of gearing going forward.
Analysts at Macquarie come up with a slightly higher number, figuring that post the raising, pro-forma net debt will be reduced to $253m. Looking forward to FY10, Macquarie has pencilled in a net debt level of $300.3m, assuming a $475m capital raising comes off along with the sale of the group's insurance, hardwood forestry and fertiliser businesses.
However, this debt reduction has come at a price, with Macquarie cutting its FY10-11 EPS by 55% because of the capital raising. On the other hand, FY10-11 net profit should jump more than 74%-85% on its numbers, due to significantly reduced interest costs as a result of the improved debt position.
So with this issue soon to be behind the company, Deutsche thinks the focus will now shift to the group's Transformation Program. The good news here is that Deutsche expects this will improve earnings going forward. The broker forecasts that EPS will grow in excess of 20% per year in FY11 and FY12, which is when it expects the transformation program will have its greatest impact.
The program, which was announced in December 2008, includes a complete re-orientation of the company to become a customer facing business rather than a product-centric business. It will also see the replacement of state offices and management structures to a regionally based and sales focused system, while non-performing and non-core operations are to be phased out.
There is also a chance that the transformation program could be completed ahead of schedule, which means upside risk to the broker's nearer-term forecasts. However, warns Deutsche, should the program fail to increase earnings and reduce working capital, there is significant downside risk its numbers.
That said, the focus still seems to be shifting to the upside and while the FNArena sentiment indicator is at zero, with 4 Holds and nothing else on the stock, it seems that after the tough times, brokers are at least discussing the upside and not just mentioning the downside anymore.
The latest to put out an opinion on the stock is RBS, who today confirmed Elders is a significantly different company to the old industrial conglomerate known as Futuris. The broker calls it a turnaround story under a new management team. The call now is whether one can trust that management will increase underlying earnings margin in the Rural Services business from 2.5% to 5-6% over the next three years.
While the broker thinks this is not without risk, RBS does think it can be done by implementing best-of-practice retail standards, that should come about as part of the transformation plan. On top of that, RBS notes the managing director has a track record of doubling margins at his previous job as head of Coates Hire.
The last vote of confidence came from major shareholder QBE, who the broker notes has independently tested the margin goals during its refinancing process.
With the stock trading at an expensive looking 18.5x FY10 EPS on Deutsche's numbers and also in-line with the broker's 25c target price, Deutsche Bank believes a Neutral call is the right one for now. But with the FNArena consensus target price at 35c and the outlook seeming to be on the improve, it will pay to keep an eye on what the FNArena broker universe has to say about this stock in the months ahead.
Yesterday, shares in Elders were flat at 25c versus a 12-month trading range that runs between 21c to $1.65 just 12 months ago.
ELD Price at posting:
$2.40 Sentiment: None Disclosure: Held
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