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Environmental conditions affect Ruralco’s profits

Ruralco Holdings Limited (ASX: RHL), has announced that due to poor industry-wide market conditions, shareholders should expect depleted earnings and profit to be announced late in May.

The company’s update outlined that hot conditions and diminished rainfall were likely to blame for the fall in profitability and demand for the company’s products, including agricultural chemical volumes and lower livestock prices.

In early Tuesday trading, shares had fallen by 9.1% to $2.80, after the company warned it was expecting earnings before interest and tax (EBIT) to fall between 40-50% as compared to the previous corresponding period. Furthermore, whilst the company expects to break-even with last year’s net profit after tax (NPAT), it also expects that before non-recurring items are taken into account, its underlying NPAT will fall by 60-70%.

John Maher, Ruralco’s Managing Director, noted that the revaluation of the company’s strategic investment in Elders Limited (ASX: ELD) would be the most substantial non-recurring expense item for the period, with interest expense expanding by approximately 10% from the previous period on their 12.4% shareholding.

Maher also explained that market conditions were responsible for the average sheep and cattle prices being down by approximately 30% and 11% respectively.

Ruralco isn’t the only agricultural business whose share price has been negatively affected in recent times. Shares in Ridley Corporation Limited (ASX: RIC) fell by 17.7% in one day late last month, when it was announced that due to external pressures, its full year EBIT would remain at similar levels reported last year. Meanwhile, shares in Nufarm Limited (ASX: NUF) have fallen by 32% since late January, after reporting a 55.7% drop in NPAT.

Foolish takeaway

Even in the difficult market conditions, trading volumes in wool, real estate, water solutions and insurance operations are expected to deliver gross profit above or in-line with the previous corresponding period.

Whilst four months of poor environmental conditions have heavily influenced Ruralco’s profit guidance, the company has stated that things were starting to look up in the final two months of the period, and is expecting that a strong second-half should support its poor first-half for full year results. This, in addition to its strategic investments acquired in February this year, will hopefully lead the company to far better future performances.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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