Elders Limited [ASX:ELD] released its half year results today.
They showed a whopping 83% increase in profits after tax. Even without anomalies that are ‘unrelated to operating financial results’, underlying profit to shareholders was up 16.2%.
Revenue from continuing operations grew 2%. They’ve also managed to shrink their net debt by 63%.
That’s a great comeback, considering that this time last year they reported a $10.2 million loss.
What did Elders say in their release?
So what was behind these encouraging results? Well, Elders execs credited livestock prices. They provide agency services for selling livestock. So the higher the livestock price, the better their margins. But that wasn’t all.
They’ve also been diversifying their export destinations, to protect the company from fluctuation in demand. Elders CEO Mark Allison said that ‘Whilst Elders benefited from an uplift in livestock prices in the first half, our focus remains on what e can control as a business […] The diversification of our Live Export Business across new markets and customers has increased flexibility and profitability’.
In other words, they’re trying to not rely too much on strong prices.
They’re also focusing on their Killara feedlot. The Killara feedlot is a facility they own, where cattle are kept before they’re sent overseas or to an abattoir here. Cattle farmers sell their cattle to be ‘finished’ (fattened up) at the feedlot. When they do this, the cattle are of a consistently higher quality. This helps the feedlot owner to get a better price per head, and in turn make a higher profit.
Elders has been making their Killara feedlot more efficient. In combination with strong demand, and getting rid of feedlots in other areas, that’s ‘contributed to a $1.6 million margin improvement for our Feed and Processing business’.
Source: asx.com.au
[Click to enlarge]
The chart above shows just how strong the profit growth from agency, feed and live export services was.
What other companies could benefit from these conditions?
It’s possible that other beef exporters could benefit from good prices and strong demand for feedlot services.
Many analysts have forecast continued price growth for 2015. MLA analyst Ben Thomas says prices could go up by 30%, thanks to increased demand and drought conditions. Rabobank analyst Angus Gidley-Baird agrees. In the latest Rabobank ‘Beef Quarterly’ report, he linked price rises to historical changes in times of drought. In a release accompanying the report, he said ‘Looking at the last two drought periods in Australia, prices increased from the bottom of the market to the top by as much as 80 per cent.’ That would be pretty good for producers and processors.
For example, Australian Agricultural Co. [ASX:AAC] released their full year results last week. Thanks to strong demand for their boxed beef and live export cattle, they were back in the black — just. They went from a $39.9 million loss to a $9.6 million profit. Their new Livingstone abattoir in Darwin started operating last October. They’re aiming to have it processing 1,000 head of cattle later this year. They’ve already started making contracts for external cattle producers to supply them with cattle. Investors will be waiting eagerly for the next report later this year.
Ruralco Holdings Limited [ASX:RHL] is expecting similar results to Elders’. Their last report said that ‘[there is] robust demand for Australian […] meat [and] increased interest in rural properties offering production leverage [to beef and other] preferred commodities. [We also] anticipate solid contributions from water, live export and grain businesses […] with support from traditional retail, wholesale and agency operations’.
They also said that ‘Frontier International [beef export ‘partner’] will benefit from its first full year shipping programme, and has a pipeline of contracts to be fulfilled from 1Q15 onwards’.
Their half year report is due in the next week or so. It will be interesting reading for spectators following the agribusiness sector.
Eva Mellors,
Contributor, Money Morning
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