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After a bleak week, Elders on the radar for value
June 10, 2010

THE share-price capitulation that has greeted the latest instalment of bad news from Elders should put the agribusiness group on the radar of value investors.

Elders shares have fallen 47 per cent since it completed a massive recapitalisation last year, with the latest 15 fall to 80 taking place over the past two trading days.

This week's share-price decline follows news that the company's troubled forestry division is expecting only minimal managed investment scheme sales in the June selling season due to a combination of weak demand and the company's inability to secure bank financing for investors.

However, the recent price drop has surprised investors, many of whom believe the company is now oversold - forestry activities have never been regarded as a growth driver for the business. One analyst yesterday said that the company was trading at a sizeable discount to the sum of its parts, and releasing value should not be too hard.

One readily saleable asset is Elders' 40 per cent interest in Rural Bank, worth about $140 million. Elders' automotive division, which supplies interiors to Ford and Holden, is worth about $200 million.

Offloading these assets would wipe out Elders's debt, leaving the rural services business as its primary profit driver. The signs are there for a profit turnaround as agricultural conditions improve and chief executive Malcolm Jackman's efforts to introduce supply chain efficiencies bear fruit.

Brokers who believe the story, such as Deutsche Bank, think rural services earnings before interest, tax, depreciation and amortisation will increase from $10 million in 2009 to $83 million in 2012, supporting a valuation of $1.50 a share.


Rural risks

ALTHOUGH Elders may be undervalued, the company is unlikely to attract takeover interest any time soon. Offloading non-core assets would be hard enough to put off trade buyers such as Canada's Vittera, which might otherwise be interested in a freestanding rural services business.

And while a break-up play MAY be attractive to private equity at the right price, there Is a risk not just in asset disposal but in the rural services operation itself. Profits in the business are volatile due to the effects of drought and the risks inherent in carrying large stocks of fertilisers and agricultural chemicals.

Elders's current investors are well aware that it's not easy to avoid large inventory write-downs if global pricing or currency movements swing the wrong way. And that's likely to be enough to scare off most private equity players.