The facts regarding DGL – 2H FY24 outlookIn the Business Update...

The facts regarding DGL – 2H FY24 outlook

In the Business Update lodged with the ASX on 14March, Simon noted:

• “The Company is seeing a strong rebound in activity in the second half of FY24”
• “Demand for crop protection products has recovered strongly”
• “DGL’s production facilities are working at full capacity to meet a significant increase in forward orders”
• “Environmental treatment facilities are receiving considerably higher volumes of material than experienced in the first half”
• “Demand for DGL’s products and services remains strong, and the outlook is positive for a stronger revenue and profit performance in the current half”

Simon made a comment in his recent interview on Twitter (TheMikroKap) that:

• “We are having a solid second half. I’m expecting that the Company will be broadly in line with its consensus… no two halves are ever the same… we’re just having a very solid second”

Let’s analyse that – see below I have set out broker consensus earnings for the second half (compared to the first half) for DGL.

What it points to is a return to double-digit earnings across allP&L metrics – which would be a great result, particularly coupled with improved cash conversion.

People need to remember that 1H, the resultthat got us slapped in Feb, was a very long time ago – markets move, and it seems DGL’s business performance has meaningfully improved.

Let’s also take a look at the balance sheet at 31 Dec 2023.

Still have A$269m of Property, Plant and Equipment on balance sheet, including:

• A$105m of land
• A$59m of buildings
• A$80m of motor vehicles and equipment

I think everyone needs to remember that this is a company where

• It is extremely specialised
• Very high barriers to entry, both on capital and regulatory (permit) side
• Has been around for ~20 years, making Simon very wealthy
• Still Founder-backed and run – Simon hasn’t sold a share
• Whilst 1H was tough, there were a lot of acquisitions made – Simon now knows the importance of delivery
• He won’t be satisfied with 55% of A$170m market cap… he will want much, much more for his personal wealth

Elders (1H result to 31 March 2024, and outlook commentary)

It is also worth having regard to Elder’s result to 31 March 2024, given at IPO Elders was DGL’s largest customer.Although DGL has diversified away from being exposed majorly to AgChem, it is a good look-through.

Some snippets from their result include:

• “Trading in the second quarter (1 Jan 2024 – 31 March 2024) improved following an uplift in client sentiment supported by un-forecast, widespread rainfall across many regions in eastern and southern Australia”
• “Livestock prices recovered strongly throughout the half in line with improved seasonal conditions, which have also assisted the outlook for the 2024 winter crop and Elders’ second half”

Remember – this ‘second quarter’ is a period we don’t know about for DGL yet – so it is very encouraging that it was strong for Elders.

Further, putting the puzzle together, Elders FY24 outlook (covering 1 April 2024 to 30 September 2024, taking us to the end of DGL’s year) says:

• “Elders expects better trading conditions during the second half of FY24, as client sentiment continues to improve following a return to average seasonal conditions. This improved sentiment is forecast to positively impact the outlook for winter crop and livestock production”
• “a return to average seasonal conditions in the second half, with generally favourable soil moisture profiles and improving client sentiment following the end of El Nino, is expected to have a positive impact on the Rural Products business”
• “Outlook for H2 improved with good moisture profiles in many winter crop regions and a promising recovery in livestock prices”