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Elders shares slump amid climate and economic challenges

Elders (ASX:ELD), Australia’s foremost rural services group, encountered a significant blow on Monday as its shares plummeted nearly a quarter following a trading update. The update revealed an earnings downgrade of between 20% and 30% for the fiscal year ending on September 30.

The announcement, just six weeks away from the release of the company’s half-year results, and eight days past the close of the six-month period, caught many by surprise. Elders attributed the downgrade to a combination of factors including the subdued El Niño event in late 2023, resulting in reduced customer spending, low global prices for key crops such as wheat, and a delayed start to the winter crop season in Western Australia.

Sales of products are now anticipated to be deferred to the second half of the fiscal year 2023-24 due to these challenges. While trading showed signs of improvement in January and February compared to the preceding months, March witnessed further downward pressure on margins, as outlined in Monday’s update.

According to the company’s statement, trading rebounded in the early months of 2024, primarily due to improved client sentiment following the Bureau of Meteorology’s announcement of a weakening El Niño and a notable improvement in sheep and cattle prices. However, margins in key agricultural chemical products were adversely affected in March, impacting the overall outlook.

Elders projected an underlying EBIT (Earnings Before Interest and Taxes) of between $120 million and $140 million for the full fiscal year 2023-24, a significant decline from the previous year’s underlying EBIT of $170.8 million. This would mark the second consecutive year of a substantial earnings decline, following a 26% drop in the previous fiscal year.

The financial strain has raised concerns regarding the company’s dividend payouts, with the possibility of a reduction in the dividend for the fiscal year 2023-24. In the previous fiscal year, the dividend was slashed to 46 cents per share from 56 cents.

Furthermore, Elders anticipates its leverage (debt) to exceed its target range of 1.5 to 2.0 times (EBITDA) throughout the fiscal year 2023-24, due to underperformance in earnings during the first half. However, the company expects leverage to return to within the target range by the first half of the following fiscal year.

Elders acknowledged that external variables, such as the outlook for Australian agriculture, market price fluctuations, supply chain disruptions, and geopolitical events, could significantly influence its financial outcomes or their timing.

The challenges faced by Elders underscore the broader impacts of climate variability and economic uncertainties on the agricultural sector, highlighting the need for resilience and adaptive strategies within the industry.

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