With profits continuing to recover, reinvigorated Elders wants to buy back more of its old insurance business and is keeping a careful eye on big and small farm services operations which could join its fold.
Managing director, Mark Allison, is not ruling out making a play for New Zealand farm services kingpin PGG Wrightson either, but he won’t put that potential $600 million acquisition on an active watchlist unless the figures really add up to make it worth raising extra capital from the market.
In the meantime, Elders will use existing cash flow, including up to $13m from the sale of its Indonesian feedlot, abattoir and palm plantation, to meet its goal of 20 extra branches around Australia by 2020.
Far North Queensland, southern and western Victoria, South Australia’s Eyre Peninsula, West Australia’s wheat belt, and the NSW-Queensland border are all target areas for more Elders branches and retail supplies stores.
Queensland, Northern Territory Victoria and WA are also candidates for more financial services activity.
Retail, hort result boost
Elders, which has just announced only its second dividend in 10 years (nine cents a share), reported an eight per cent statutory profit lift to $41.4m for the first half of 2017-18, helped considerably by southern retail business and horticulture.
It maintained its return on capital well above target at a respectable 28pc having lifted revenue 2pc to $749.7m, and kept average net debt for the past six months steady at $143m.
A dry summer has, however, bitten into earnings from cattle markets Australia-wide and farm chemical sales, particularly in Queensland and northern NSW.
A 20pc slip in cattle prices and fewer sale numbers in the first half are expected to followed by more downward market movement for the rest of the financial year.
Margins have also slipped at the Killara feedlot in northern NSW where rising feed costs and increased competition for young cattle saw numbers drop slightly, although the business is currently at 97pc capacity and if dry conditions continue cattle throughput is tipped to stay strong.
Overall, the company expects cash flow for the next six months to be generally flat.
We’ve anticipated the cattle market downturn and will be countering that with more acquisition opportunities
Fortunately, a strong sheep and wool sector, including increasing saleyard throughput, helped make up earnings gaps in the livestock business, particularly in southern Australia, with Tasmania posting a strong performance.
Real estate gross margins grew by $700,000, but while rising property values improved sale returns, the number of properties offered for sale shrank.
In addition to recent business acquisitions in western Victoria, Sydney and WA, Elders’ 2017 purchase of horticulture service provider, Ace Ohlsson, returned a handy contribution to its bottom line, providing something of a safety net as broadacre conditions dried out.
Ace Ohlsson’s earnings, plus the overall Elders network’s retail sales growth, delivered a $9.4m marging improvement, Mr Allison said.
Sheep up, cattle down
“Strong wool performance and additional sheep earnings from agency acquisitions were offset by declining cattle prices and volumes, but still saw a $700,000 uplift in agency margins,” he said.
“We’ve anticipated the cattle market downturn and will be countering that with more acquisition opportunities, including within the horticulture sector where possible.”
He noted North Queensland’s sugar belt was also under-represented in Elders’ footprint.
“There are many blue chip areas where we are not yet present and we do intend expanding our branch network further, although that doesn’t mean we have to buy,” he said.
“There is no acquisition fever within this business.
“Any potential acquisition will be treated the with the same strict financial discipline required to deliver return on shareholder capital, regardless of size.”
I’d be happy to take Elders Insurance (ownership) back up to 50pc over time if QBE is happy to talk further
Mr Allison said Elders had an active pipeline of bolt-on prospects to weigh up, starting with several independent agencies whose owners were looking at succession options for their family businesses.
Discussions were also ongoing with insurer QBE, which owns 80pc of the Elders Insurance brand.
“I’d be happy to take that back up to 50pc over time if QBE is happy to talk further,” he said.
“It makes sense on several fronts for us to have another 10, 20pc of 30pc stake in the Elders insurance business.”
Elders also had a watching brief on bigger businesses which may be distressed or under performing and intended to be on the front foot if agribusiness sector consolidation happened.
However, after only recently digging itself out of massive debt and over capitalisation problems, the 178-year-old firm was reluctant to buy into any significant venture if profitability depended on rationalising part of the new purchase.
“The most obvious attraction of any acquisition is invariably the synergies and scale which consolidating resources brings, but that can also be a high risk strategy if it means closing branches or cutting staff,” Mr Allison said.
“It’s not really something we’re keen to be part of.
“Having made a very big turnaround and established ourselves as a disciplined, stable and stronger enterprise we may even choose to make some sizeable acquisitions, but we won’t put all our achievements at risk.
“If necessary, we can keep doing what we’re doing today and still meet our targets.”