Motley Fool Australia

Is Elders Ltd a turnaround opportunity?

Several contributors, including myself, have written about the potential for the Australian agricultural industry, especially since the signing of the Free Trade Agreement (FTA) with China late last year.

One company widely overlooked during the flood of news was Elders Ltd (ASX: ELD), mainly thanks to that company having been something of a train wreck at the time, buckling under high debt and weak businesses.

Since then the company has streamlined its operations noticeably, including a 10-into-1 share consolidation, reducing the number of shares on issue from over 800 million to today’s figure of ~86 million.

Financial Year (FY) 2014 also successfully delivered a return to overall profits, and the success of Elder’s premium meat business in China has seen the company contemplating expanding its operations to replicate the same model in Indonesia and Vietnam.

According to a Fairfax Media interview with Elders’ CEO Mark Allison, Elders is reaching critical mass in China after several years of losses, and is now trading profitably.

With Elders aiming to increasingly use its own branded products (working towards the company’s aim of being a fully-integrated meat producer), Mr Allison reported there was much more upside to come from the China business.

It’s a similar strategy to the one employed by competitor Australian Agricultural Company Ltd (ASX: AAC), though Elders appears to be a little way ahead of AAC on its overseas plans.

Another potential advantage of Elders’ experience in Asia is the ability to open up foreign feedlots at vastly reduced costs compared to similar Australian operations.

With beef demand growing, Elders’ market presence expanding and the ability to leverage domestic expertise to create low-cost foreign operations, Elders could be a sound long-term purchase for the right investor.

While there will inevitably be the ups and downs associated with owning an agricultural company, Elders looks to be on the right track to deliver growing returns to shareholders.

Don’t be put off by the recent tripling in price either – while Elders might look expensive on that metric, it is still down 75% in the past 5 years and 98% in the past 10.

Recent gains look to be from positive sentiment gained since a return to profits last year, and with long-term demand tailwinds and short-term growth coming through, I think Elders looks cheap at current prices.

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Returns as of 6th October 2020

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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