It’s never easy recommending a share at an all time high. However, the growth momentum of Elders Ltd (ASX: ELD) is such that it is still attractively priced.
Agricultural conglomerate Elders is in the right place at the right time. Last year the agricultural sector grew by 12% to $63 billion. Though it’s forecast to moderate to $60 billion in 2018, this is still an industry ripe with opportunities.
I’ll leave guessing prices in cattle, wool and grain to the experts, and just concentrate on the metrics of why Elders is a great business for investors.
Last year Elders grew its underlying profit after tax by 40% to $57.7m. With further mid-teen growth expected in 2018, the company trades on a P/E of only 13.8x.
What I like most, though, is Elders ability to generate cash. Last year it converted $85m of EBITDA into $78m of free cashflow. This means that the company was able to pay its interest, tax, dividend and capital expenditure, and still have $78m to spare. It’s a sign of a very good business.
That cash was all invested. Half went into acquisitions, the other half to buying out the last of the troublesome hybrid securities, leaving the group free to pay ordinary dividends again.
In terms of balance sheet quality, Elders’ return on capital employed is an impressive 27%. Its net debt to EBITDA ratio has fallen from 2.2x to 1.8x in the last year. This gives Elders plenty of opportunity to increase its footprint by acquisition, especially in areas such as financial services.
The other thing I like about Elders is the scope to offer digital technology to the old fashioned agricultural sector. Elders Weather is one such example of the type of value added service that the company is starting to offer to farmers and growers.
Despite its share price run Elders is still surprisingly cheap. With such momentum in the business, I think that there’s still plenty of growth left for investors in the shares.
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Motley Fool contributor James Middleweek 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.