Elders Limited hitting multi-decade lows
Looking at the chart of Elders, the iconic Australia agricultural company, reminds me of the old joke, how do you make $1million in the stock market?
Start with $20million and invest in Elders. boom boom!
So is it time to buy this falling knife? Is Elders a turnaround play?
Citi certainly think so and re-initiated coverage on the stock in mid January with a buy call and $2.10 price target, believing rising agricultural chemical and fertilizer prices and recovering demand at the farm gate will make for improved trading conditions through FY10 and beyond. Apparently Citi doesn’t believe in the adage not to try and catch a falling knife! Though it’s unfair to pick on Citi as the consensus target of the six analysts covering Elders is even higher at $2.20 and the time since Citi’s recommendation so brief.
Looking up at the chart I believe the correct technical term for this pattern is complete dog. Therefore, the first things we need to do is try and estimate where the floor could be.
From the SPP document (I’ll try to remember to link everything at the bottom) their pro-forma net assets (taking into account recent changes) as of June 30 2009 were $1,230M with intangibles of $238M giving an NTA per share of $2.21. So $2.21 is the first stick in the ground, but the market clearly thinks ELD is worth less than it’s net assets. My rough adjusted NTA per share is $1.40 based on discounting assets.
Let’s now look at some valuations. Clearly ELD is a dog. Even in the good years it had a pitiful ROE. We’re not looking for a great company here, we’re looking for a turnaround play, a company so out of favour that if it turns around an investor will receive large returns for their risk. Elders are aiming for $84M EBIT this financial year, ending in September. That prices ELD on an EV/EBIT of 5, so not particularly cheap (please note all my figures are very approximate as it a big challenge working out where this company is).
Allow for some interest and tax and I estimates eps of just under $0.10, putting ELD on a forward P/E of 14, once again not cheap. It appears ELD offers no margin of safety on the earnings front, but perhaps its balance sheet offers some safety. At best ELD looks fairly priced. I’ve added it to my watch list and another 20% down will get me very interested. It’s very difficult to estimate where the floor might be, but value investors are probably already sniffing around so I’m going to say $1.20+/-20%. The consensus earnings estimates for FY10 and FY 11 are $0.103 and $0.125.
When looking for turnaround plays the best play book to use is Peter Lynch’s. The following notes are cribbed from this old thread at TMF.
With a turnaround, describe what the company is doing to improve itself, (asset sales, debt restructuring, capital raising, refocus on core) whether the company can survive (yes that is now highly probable), and whether the company’s plan is working (still to early to tell). It makes sense to look at the company’s most successful year to form an idea of the turnaround possibilities (make sure to reduce peak earnings by the divestitures and add back reduced interest costs). You might investigate that year to find out what conditions, if any, enabled that success and whether the company can duplicate the same formula now.
Debt is something to fear with turnarounds.
How is the company supposed to be turning around? Has it rid itself of unprofitable divisions?
HOW TO REACT TO EVENTS
- A poor earnings report would be cause for great concern for a fast grower but shouldn’t be judged with the same fear in a turnaround or asset play.
- A sharp rise in a stalwart’s price is more worrisome than the rise in price of a fast grower or a turnaround which actually is turning around.
- A cut in the dividend, while generally not a positive event under any circumstances, would usually be far more worrisome for a slow grower than for an asset play or turnaround.
TOTAL RETURN POTENTIAL
Almost in payment for the risk you take when buying them, a successful turnaround can often make more money for you in the shortest amount of time when purchased at a low price and the company really does turn around.
KEY QUESTIONS
Key questions to ask about a turnaround include:
- What is the company’s financial condition?
- What is the story for turning around the business?
- Is business coming back?
- Are costs being cut?
- What is the catalyst for change in this company?
- Most important, can the company survive a raid by its creditors? How much cash does the company have? How much debt?
- What is the debt structure, and how long can it operate in the red while working out its problems without going bankrupt?
Finally, if an once the company successfully turnarounds then evaluate it as the new category.
The Story
Elders forecast a turnaround in EBIT for 2010 from $17M to $84M. Debt has been reduced via the institutional and shareholder placement and asset sales. Gearing is now low. The dividend has been suspended until 2012. A new management team is in place with a lot to do to reverse the previous team’s diworsification of Elders. It’s still to early to predict the success of any turnaround; however, the risk of total failure now appears low. Unfortunately the potential rewards don;t appear to be great either.
Risks
Pleixcor put and debt. (see SPP for more details on this and other risks)
Key Statistics
The following key stats are from StockVal, an Australian stock valuation service I’m currently enjoying a trial of. These figures should not be relied on due to the current restructuring at Elders. A clearer picture will emerge when half year results are announced around May.
| Category | |
|---|---|
| No. Ordinary Shares (m) | 448.6 |
| Market Price at 01/02/2010 | $1.39 |
| Investment Value at Required Return | $1.37 |
| Equity per Ordinary Share | $2.51 |
| Year High – Market Price | $1.70 |
| Year Low – Market Price | $0.14 |
| NTA per share | $1.90 |
| Intangibles per share | $0.61 |
| Liabilities per share | $5.42 |
| Borrowings per share | $2.55 |
| Net Debt to Equity Ratio | 66.6% |
| Normalised Earnings per share | $0.12 |
| Normalised ROFE | 7.4% |
| Equity Ratio | 31.6% |
Links
- Elders Field Days 2009
- 2009 SPP Prospectus
- Peter Lynch Notes at TMF and some more.
- Elders Investors Site
- CEO presentation from AGM
If Elders manages to produce profit at the same rate and density of documents then investors will be rich! Prolific is an understatement.
Disclosure: No position in Elders at time of writing.
Related posts:
Hmm…nice analysis. As long-time suffering shareholder of Elders (Lord, why me?), I’ve all but given up on this company.
Still, besides the issues you have covered, there are one or two other positives.
I think the new management can be expected to surprise on the upside. I think Malcolm Jackman is one of the better operators out there and this sort of company does suit his style. The vision he has articulated is clear, sensible and a welcome change from previous management. I think he can pull this one off, though it will be hard.
Secondly, rainfall since November across most of QLD and NSW should add some sort of a kicker to earnings (hard to say exactly as the company’s books are such a mess). I think Elders might be lucky enough to coincide a recovery year with a good year for the rural sector.
Am I just fishing for something to keep me positive about the company? Maybe, but every dog has its day (I hope).
Hi Justin, thanks for your comment. I empathise with your pain, I’ve had shares do the same to me, heck even recently with Great Southern TREES.
I was surprised to find that ELD wasn’t selling for a greater discount. I had hoped it was already very cheap and I was going to get to nab shares at a big discount. Perhaps the story is too closely followed to allow that. As a long term holder you’ve got a considerable advantage to investors like me who are only now diving into the story. I know it probably doesn’t feel that way now, but time brings a level of knowledge and understanding that analysis can’t match. Good luck I really hope it works out for you, though I do hope we see $1.20 first
I don’t think you’re fishing and this is probably not a good time to selling out, but have you considered a tax loss? While the ATO frowns on trading for the sole purpose of tax losses, their guidelines are vague. There are plenty reasons why you might consider selling now and buying at a later date, or doubling now and selling half later. Or maybe you want to do an off market transfer from one legal account to another (eg your name, your wifes, family trust, SMSF) for some particular reason. Naturally check any thoughts you have with your accountant and none of what I’ve said should be considered advice or a recommendation or anything akin to those.
Also, if ELD does fall below $1.20 can you please leave another comment. One of my failings is that I often miss opportunities as I forget to check them for a couple weeks only to find they dipped below my buy price when I wasn’t looking. TIA
Hi Dean,
Selling for the tax loss is an option, though I have still a few tax losses up my sleeve from a few speculative bets that blew up in 2008.
I see it’s down another 4% today (weeps into his beer)
Hi Dean,
An alternative and more direct play on fertilizer prices might be Nufarm. I have a buy price on NUF at $9. The current price is being affected by the Sumitomo bid for 20% at 14.00, but this is not a concrete certainty. If the Sumitomo proposal looks shakey, the price could get interesting. Margins appear to be at the lower end of the band due currently.
I don’t know anything about ELD, I’d consider buying a small punt at 80c. Maybe there are assets that could be sold and it’s a cigarette butt with one last puff.
On the turnover potential Morningstar’s writup : “As a low-margin business, ELD is highly sensitive to changes in EBIT margin. A sustained 1% lift in EBIT margin would boost valuation around 50%.”
** that was from the Morningstar valuation 10/9/09, before the 10:1 consolidation. Currently Morningstar rate it fair value 1.6, buy at less than 1.0
Leave your response!
SUBSCRIBE by RSS
or Subscribe by EmailTags
Categories
Archives
Free Spreadsheets
Blog of the Day
Blogroll
Aus/NZ Blogroll
Recent Posts
Most Commented
Quotes