Closing the door on Elders Hybrids

Elders has released a worse than expected result for the half-year ending 31 March. Earnings before interest and tax (EBIT) in the key rural services division swung to an underlying loss of $7.7m, from a profit of $21.1m in the prior period. Meanwhile, earnings from its automotive division fell 7% to $5.0m, despite tepid revenue growth of 3% (see Table 1).

The rural services division suffered from a hot dry summer, which reduced demand for insecticide, fungicide and herbicide products. Lower land, wool and livestock prices didn’t help either. The promised turnaround is further away than ever and current conditions will weigh on any sale price.

Still, the rural services business remains an attractive asset for someone such as Ruralco – which owns 12.4% of Elders and recently received ACCC approval to bid for the business – or an international agricultural group.

The automotive division, which is also for sale, suffered a blow during the half as Ford confirmed it is pulling out of the Australian market in 2016. Ford currently represents around 25% of sales. This too doesn’t bode well for the sale process.

The troublesome forestry division is still sapping money from the coffers: $22m in the past half. Management expects the value of the assets that remain for sale to be absorbed by ongoing running costs. The net benefit to Elders is likely to be zilch.

Banks take reins

For now Elders has the support of the banks, but it's likely to be a tense relationship. They’re keen on getting their $386m of loans back and have little incentive to wait for the best deal as long as they are paid.

Both remaining assets – rural services and automotive – are now likely to fetch much closer to their lower end valuations of $250m and $50m respectively. We’d now be surprised if Elders receives over $300m in total, which would leave everyone but the bankers out of pocket. First in line is Elders Hybrids owners which are owed $150m at the face value of $100, it’s increasingly likely that they'll end up with nothing near that, and perhaps nothing at all. Ordinary shareholders are worse off still and it’s extremely difficult to see them getting anything.

In Forest fells Elders’ Hybrids on 13 Oct 11 (Hold – $37.95) we admitted our original recommendation to buy the Elders Hybrids was a mistake, having underestimated how long a turnaround would take, the probability of it happening and the value of Elders' underlying assets. We decided against selling out then as the value on offer still seemed compelling. Now it isn’t.

Asset sales have taken too long and the turnaround has proved too illusive. Although the security price has fallen since then, the value has fallen much further. The chance of being wiped out is not new, but the probability of it happening has increased substantially. Meanwhile the chance of a positive outcome has all but evaporated.

By selling now you’ll also lock in tax losses, which can be used in the current financial year rather than potentially risk waiting another year.

If a higher bid appeared for the rural services business it could boost the Elders Hybrids security price, and for those who want to chance it and await possible gains we’ll continue to follow the story. Still, with the bank effectively in control and the recent results not granting chief executive Malcolm Jackman much wiggle room, chances of gains are slim. There are far better opportunities on our buy list and within our model portfolios and we suggest you SELL.

Note: We’re selling the 70 Elders Hybrids from the Growth Portfolio for $26.50 each netting the portfolio $1,855.