The Elders Ltd (ASX: ELD) share price has plunged 24% today after revealing a disappointing trading update.
It is heavily involved in the Australian agricultural sector. Elders’ business operations cover markets, tailored advice and specialist knowledge across a range of products and services, including farm supplies, agronomy, livestock, wool, grain, finance, insurance, and real estate.
Weak FY24 trading update
It said that the first half of FY24 trading was below expectations for a few different reasons.
The company points to subdued client sentiment after an El Nino declaration by the Bureau of Meteorology, particularly impacting the first quarter.
There are lower crop protection prices compared to the prior year, impacting sales revenue and the profit margin.
Cattle and sheep prices are “significantly below the 10-year mean, particularly impacting the first quarter.
The company pointed to subdued trading in March due to a lower start to winter crop in Western Australia, which is a “key broadacre market”.
Finaly, the company said margin pressure was evident in some key agricultural chemical products.
The combination of all of these issues is bad news for the Elders share price.
What happened to the positivity?
Elders noted that trading recovered in January and February 2024, and beat the last year, largely as a result of improved client sentiment after the Bureau of Meteorology’s February 2024 announcement of a weakening El Nino and significant improvement in sheep and cattle prices.
The outlook for the FY24 winter crop in most regions is “improved” with favourable soil moisture profiles across many winter cropping areas. Conditions reportedly remain dry and warm in some parts of Western Australia, which is expected to push sales to the second half of FY24.
Guidance
The guidance can often have a sizeable impact on the Elders share price because profit expectations are often how investors value a company.
Underlying EBIT (EBIT explained) is now expected to be between $120 million to $140 million for FY24. It’s targeting a cash conversion rate of more than 90% of underlying net profit after tax (NPAT).
Leverage (debt levels) is expected to be above its target range of between 1.5x to 2x in FY24 because of the EBIT underperformance in the FY24 first half, but is forecast to return to within target if the first half of FY25.
Final thoughts on the Elders share price
The business seems very cyclical, and this seems to be a bad point in the agricultural cycle.
It’s certainly possible the Elders share price could drop further from here, particularly if the weather/climate becomes drier in the shorter-term. However, the Elders share price has fallen a lot today and compared to 2022. It could be a long-term turnaround opportunity from here.
