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Will new tariffs slow Elders’ (ASX: ELD) recovery?


Will trade tensions with China effect Elders?

Trade tensions between Australia and China have taken another turn for the worse, following China’s refusal to apologise for posting a controversial image. It is just another jab at Australia in a relentless long list of intimidation tactics China is using to kneecap Australia as political punishment. In this article, we will go through one of Australia’s biggest exports, beef, and whether (and to what extent) agribusiness heavyweight Elders is affected.

Australia’s cattle and beef industries were targeted in August this year, after Beijing suspended exports from family-owned meat processor John Dee, due to the discovery of a ‘banned’ chemical. The move follows on from the banning of beef exports from four of Australia’s biggest abattoirs in May.

  • Australia accounts for between 1000 to 2000 tonnes of China’s beef imports per month and trade per year is roughly $2.84 billion. Red meat exports to China for the first seven months of 2020 totalled 170,000 tonnes which is more than what was sold to China for all of 2017. However, US and Canadian beef are becoming a more viable alternative for Chinese importers. Livestock Australia says Brazil has recently become a key player in global production growth and that trend is set to continue in 2021.

    Australia is still the best-positioned to meet increased demand as a widely recognised supplier of premium beef, but the question is, what toll will Australia’s geo-political tensions with China take, and is the US muscling in?

    There are a few stocks that are directly affected: Australian Agricultural Co (ASX: AAC), Elders (ASX: ELD), Rural Co (ASX: RHL), and Wellard (ASX.WLD).

    Elders’ North Australian Cattle Company (NACC) kicked-off the seaborne live beef cattle trade in February 2017, exporting 1,200 live beef cattle from Portland, Victoria to Shidao Port in China, destined for high-end consumers, hotels, and restaurants. 

    Four months later, however, Elders sold the NACC live cattle business, as it was not highly profitable, but short-haul cattle shipments to Indonesia, Vietnam, and Malaysia remained viable. Live export is about 5% of Elders’ business and the company is not a specialist in it. ELD is, however, good at sourcing cattle and sheep through its network.

    Elders’ main business is suppling fertiliser, agricultural chemicals and animal health products to rural and regional Australia. The company also has positions in livestock, wool and real estate. A quick glance at the share price shows earnings strength. Elders has benefited from good rainfall and strong cattle prices. COVID hasn’t caused any real negative impacts, because regional areas and farming communities are isolated from the effects of the pandemic and lockdowns. So, in effect, it has been a bit of a safe haven. Drought has been an ongoing issue for Elders, but this year, more rain has fallen on the east coast of Australia and the resulting boost to farmers’ confidence puts Elders in a great position. As a result, government forecasts are for 24.3 million tonnes of crops, the largest crop forecast in over the past ten years. ANZ is even more bullish, saying that Australia looks set to harvest its second-largest grain crop on record: it says ideal cropping conditions over the past year, following two years of drought, has the overall Australian grain crop tipped to surpass 50 million tonnes for only the second time on record. The bank says wheat production alone could more than double, to about 30 million tonnes.

    At its recent FY20 result, Elders recorded bumper sales, up 29%, and underlying net profit up 71%, leading to a dividend boost of 22%, to 22 cents a share, fully franked. The message here is that Elders stands to benefit from rain on the east coast as farmers buy more crop and protection products. Citigroup has initiated coverage on the stock with a Buy recommendation and target price of $13.00 (versus current price $10.25). The broker says “resilient earnings growth and return on capital are attractive features of Elders,” underpinned by above-average livestock prices and beneficial seasonal conditions.

    A recent program of acquisition of smaller compatible businesses is gaining momentum. In June, ELD purchased Dalby (Queensland) independent stock and property agency, Eastern Rural. In June last year, Elders bought Australian Independent Rural Retailers (AIRR), which has eight warehouses and five retail locations. All in all, Elders looks like it is in great condition as its “second quarter performance was ahead, year-on-year, in line with widespread rainfall and strong demand for crop protection products.”

    Synergies from acquisitions remain the driver of medium-term earnings growth, primarily through the backward integration of generic private-label crop protection and animal health products. This integration could add $18 million to operating earnings by FY22, in Citi’s view. 

    However, Citi continues to see consensus FY21-FY22 earnings for ELD as yet to reflect the annualised benefit of the AIRR acquisition (and synergy realisation), a normalisation in the summer crop (estimated sales flow in 1H21) or incorporating the scale of upside from integrating three generic portfolios across the combined ELD + AIRR business. It also sees upside from migrating independents onto the AIRR platform (about 600 independents in the market).

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