Elders Hybrids

Elders reported another dreary full year result recently (it has a 30 September year end), reporting a net loss of $61m. Net debt also remains high, at $295m, well in excess of Elders' $61m market capitalisation. Chief executive Malcolm Jackman must be growing tired of delivering such slim progress, although he remains upbeat. Indeed, he confirmed that Elders are close to refinancing its bank debt which falls due at the end of the year.

The ‘for sale’ sign is now clearly hanging around each of Elders’ remaining divisions: Forestry, Rural Services and Automotive. The sale of forestry assets has yielded $101m so far, with the remaining assets unlikely to be worth much. The sale process drags on, but management expects it to be wrapped up by March 2013. We’re not holding our breath.

For owners of Elders Hybrids it’s the sale price of the other divisions that matter. Here it was pleasing to see a slight improvement in Elders’ rural services business, with underlying earnings before interest and tax (EBIT) rising 18% to $30m. EBIT margins though remain stubbornly low, at less than 2%, a long way from the 4%-5% management has been targeting. Still, listed competitor Ruralco (which owns 12% of Elders) demonstrates what’s possible; with EBIT margins of 3.5%. Any possible suitor will no doubt be focusing on improving these margins, and in that regard Jackman claims to have fielded calls from over 30 interested parties. The range of potential sale outcomes remains wide; we'd be happy with anything around $300m.

Elders' other division Futuris Automotive—a supplier of motor vehicle interiors—increased sales 9% to $345m. Underlying EBIT rose 10% to $19m thanks to its new Thai facility and work flowing from its contract with US-based Tesla Motors. A mild improvement is welcome and should help yield a favourable sale price.

Bringing it all together the overall result was slightly better than expected, but the situation remains risky. There’s still just enough value on offer for Hybrids owners to continuing holding, but we concede it’s a marginal call. The security price is down 19% since 30 Oct 12 (Hold – $44.50), HOLD.

Note: The model Growth portfolio owns Elders Hybrids.