The Elders share price is rallying as it could be one of the best placed ASX 200 shares to benefit from a strong agriculture cycle.
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The Elders Ltd (ASX: ELD) share price is swimming against the down current today as it became the latest buy idea from a leading broker.
Shares in the agricultural goods and services group jumped 3% to $11.66 in the last hour of trade.
That’s an impressive rally given that the S&P/ASX 200 Index (Index:^AXJO) lost around 0.5%. Even its peers like the Nufarm Ltd (ASX: NUF) share price and Graincorp Ltd (ASX: GNC) are either in the red or just barely hanging on to breakeven.
Elders share price the latest “buy” idea
Investors could be getting excited about the Elders share price after UBS initiated coverage on its ASX shares with a “buy” recommendation.
“Elders is one of Australia’s largest agribusinesses providing a wide range of farming supplies and services,” said UBS.
“We view Elders as a high quality play on the improving Australian agriculture cycle.”
Strong earnings growth underpins bullish outlook
The broker is forecasting a 10% compound annual growth rate (CAGR) for Elder’s earnings before interest and tax (EBIT) over the next three years.
That’s the top of management’s guidance range as Elders looks to execute on its third “Eight-Point Plan”.
Under this plan, management is targeting EBIT growth of between 5% and 10%, and an average return on capital of 18% to FY23.
Tailwinds lifting the Elders share price
There are a few reasons why UBS believes Elders can hit a 10% growth target. This includes the Titan backwards integration benefits and $15 million of AIRR synergies.
Further, expectations of a bumper crop due to good rainfall and high soft commodity prices are additional tailwinds.
Strong earnings growth isn’t the only reason to be bullish on the Elders share price. The group could get an extra earnings kick from mergers and acquisitions (M&As).
M&A adds further upside
“M&A has been a key component of the Elders story, with the company having invested A$270mn over the past five years,” said UBS.
“Our M&A scenario analysis suggests there is 11-14% EBIT upside to our FY23 forecasts from the successful execution of potential M&A.”
The broker is assuming Elders pays around $30 million for a bolt-on acquisition in the fragmented Australian agriculture market.
UBS’ M&A target can be achieved if the acquisition is priced at 4-5 times enterprise value-to-EBIT (EV/EBIT).
ASX shares in the M&A spotlight
“We think acquisitions will seek to increase Elders’ supply chain capabilities or fill footprint gaps in high value agriculture areas the company is underrepresented in,” added the broker.
This is the season for M&As. You only need to look at recent headlines to see that takeovers are the flavour of the day. The attempted merger between Santos Ltd (ASX: STO) and Oil Search Ltd (ASX: OSH) is only one of the many recent examples.
Is the Elders share price cheap?
Meanwhile, it also helps that the Elders share price is cheap. Elders is trading around a FY22 EV/EBIT of 13x. This is a 35% discount to the ASX Small Industrials index when its average discount is 20%, according to UBS.
The broker’s 12-month price target on the Elders share price is $12.79 a share.
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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Elders Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.