Elders Hybrids

Elders has announced an underlying interim profit of $6.1m (it has a 30 September year end), down from $7.5m a year earlier. Revenue for the rural services division—critical to the resumption of distributions on the Elders Hybrid securities—fell 8% to $877.8m, and earnings before interest and tax (EBIT) was just $19.6m, down 15%. Automotive manufacturing, Elders’ only other active business, produced a meagre $3.5m of EBIT, down 24%, despite revenue increasing 18% to $168.7m.

Elders has either sold or agreed to sell $65m of its forestry assets, leaving around $120m still for sale. Reported book values are now a decent guide for future sales following the $333m write-off in 2011. Table 1 shows our updated base case valuation for Elders. If the company still has any value, it will likely be because we’ve undercooked the value of the rural services division. Given the precarious financial position of the company we prefer to be conservative, as there’s still a chance that this company won’t survive without a capital injection or white knight. 

Hybrid owners could do very well if chief executive Malcolm Jackman can find a suitor or turn the rural services business around (the latter might prompt the former), but he’ll need some luck. Indeed, it’s likely we’ll sell and move on if Jackman hasn’t sold the remaining forestry assets by 31 December. It’s also highly unlikely that we’ll upgrade the hybrid securities again, so we’re not producing a recommendation guide. The hybrid securities remain a lotto ticket, but despite the security price falling 15% since 25 Apr 12 (Hold – $40.00), we’re sticking with HOLD.

Note: The original version of this brief contained an incorrect profit figure.