Our Order Pad | IGO Limited (IGO:ASX) & Elders (ELD:ASX)

Candice: [00:00:11] Welcome, this is your financial need to know podcast, talk money to me. Thanks for joining us. I'm Candice Bourke 

Felicity: [00:00:17] and I'm Felicity Thomas, and we're excited to bring you once again one of our favourite episodes, our order pad. Now it's been a while, but in these episodes, Candace and I discuss and evaluate listed companies which have caught our eye. Maybe they're displaying impressive growth numbers we simply can't ignore. Perhaps the business recently reported solid financial figures. Are they in an interesting sector with a lot of potential? Or has the market oversold the shares, leading us to the conclusion that now is an ideal time to buy these businesses 100 percent? 

Candice: [00:00:50] And in fact, when all those factors align, it's even better, right? So today we're going to be chatting about a couple of different stocks listed on the ASX. As always, guys, please note that our conversation today is not considered personal advice, even though we are registered financial advisers at Shaw and Partners. Please note that the podcast and the content discussed in our episodes don't constitute as financial advice, nor is it a financial product. And in fact, the content on these podcasts is genuine nature, and you should always seek professional, appropriate advice before making your investment decisions. In fact, all the companies that we're going to be chatting about on our show today are offered in good faith based on the facts known at the time, and we're recording on the 19th of April 2022. And it doesn't contain all the relevant information in respect to their financial products to which they relate. So now that's out of the way. In honour of our last three episodes just wrapped up, it was a series with our very own Shaw and Partners analyst research team, so I decided to actually pick our favourite companies, which the guys Covered. So with that, Felicity, what company are you bringing to the order pad today?

Felicity: [00:01:56] I really like ordinate, one of Danny Unisa's ideas, as it has absolutely no competition, which is really unheard of right these days. However, I'm going to be a little bit naughty and I'm going to go with a stock that actually wasn't spoken about, as I think Alison has got a lot of information on ordinate to decide whether it was a buy for them. So I'm going to Kate with the analyst theme, though I'm going to pick one from Peter O'Connor. The company is Ejiro Ltd, which is actually Independence Group now the conies IPO on the ASX. And this is a company that I've been invested for clients for a few years now, topping up when it dropped as low as $3 60 levels in the Covid 2020 crash. Now it's trading around the 13th at fourteen point ten marks. It's really quite a lot in the resources commodities rally. Now the market cap is ten point eighty four billion, 

Candice: [00:02:47] so not a small overnight company. This one, I agree. I also really liked ordinate. It was a very interesting business model that made my second peak alright. But coming back to your one so y idea, tell us about the business. What do they do? 

Felicity: [00:03:00] Well, that's it. And I mean, Hirscher put a fabulous tile on our Instagram all about ordinate and a great story, which was very fancy. So I thought, I'll park that. But that was my pick. I also like your pick, but we'll hear a little bit about that one a bit later. So Itch.io owns and operates the Nova Nickel Copper Cobalt operation in WA and has invested in a lithium focussed joint venture with their partner Tiankai Lithium Corp, which comprises a 51 per cent stake in the green bushes at lithium mine at 100 per cent interest in downstream processing refinery in Indiana, producing battery grade lithium hydroxide. This was actually the outcome of the M&A of literally a decade where they got involved in this lithium mine, which is very, very exciting.

Candice: [00:03:46] So essentially, there are mining metals business in the clean energy, you know, future facing commodity space, right?

Felicity: [00:03:52] That's it. So they're really pivoting away from gold, where they actually did divest their 30 percent stake in a gold mine to really focus on creating a better planet for future generations by discovering, developing and delivered products to critical to the clean energy. What I really like about this business is they've got a very clear purpose with strong values. 

Candice: [00:04:14] Yeah, super interesting. And that does sound like a business you want to own, right? Looking to the future to solve a major problem being the climate one that's also making a difference safely and sustainably and ethically delivering products, you know, to advance the global transition to decarbonisation.

Felicity: [00:04:33] OK, exactly. So I thought you'd like this one now I do now. Through their upstream mining and downstream processing assets, Aygo is enabling future facing technologies, including the electrification of transport, energy storage, as well as renewable energy generation. 

Candice: [00:04:50] So they have really great missions. Don't get me wrong, what about the financials? Let's let's jump into those. 

Felicity: [00:04:55] OK, so like I said previously, they actually divested last year their 30 per cent stake in the gold mine Tropicana to Regis Resources. For a net, 889 million. Right? Which actually allowed them to focus on commodities critical to enabling clean energy tick. Look, the dividend yield isn't huge yet. It's around one point eighty seven percent. But we do actually forecast over the next couple of years, it'll be about two and a half percent. JP Morgan actually has it at about six per cent, which is crazy. Now, most recent quarterly results reflected a strong balance sheet. So now net cash of 570 million, we forecast net cash of one point one million for FY22. Now the impact of 91 mill for the first half. Now, the green bushes lithium mine is actually in higher production with a lower cost than previous estimates, which is fantastic, right? That's what you want to hear now. Forecast EPS growth is one hundred and twenty three point nine per cent. Forecast sales growth is 72 and a half percent, with the forecast dividend yield of one and a half percent. So, you know, I think a pretty strong balance sheet

Candice: [00:05:59] triple digits for the EPS growth like that, that's that's a major headline number, that one that's definitely going to bring in lots of investors, I think. All right. So why have you chosen idea and I guess why now also? 

Felicity: [00:06:11] Yeah, exactly. So why would I say, let's buy some more when it has rallied a lot? The reason is, I know a lot of analysts see it as fully priced. They're actually in M&A talks with Western areas, which is a small cap, right, that you wouldn't have heard of the Coyotes WSJ on ASX as part of their transformation pivot. Now, itch.io initially actually tried to take over, say, at $3 36 per share, which was rejected. This is kind of how it went. We say we want more than $3 36 per share IPO. We don't think anything materially has changed. We say it's not fair or reasonable. We'll pull the scheme. IJO. Hold on. Don't do that. Now they've actually agreed to revise terms meeting at the midpoint of three point eighty seven per share, which we actually believe is fair value. So a win win outcome for both parties. That's what you want to walk away with. Remember, we went to that advisor conference and we were told that good negotiations. Everyone walks away feeling like they've won a winner. Yeah, that's it. Well, this is what we say in Aygo are currently doing negotiation. 

Candice: [00:07:18] Want to run? Love it. Alright, so now both happy parties supposedly are talking and deliberating on the new price. 387 But let's take a step back. Let's talk more about what did I do? Why are they interested? Definitely. 

Felicity: [00:07:33] Alright, so this is a mineral exploration company engaging in mining and processing sale of nickel sulphate concentrate. Now they continue to use feasibility and development of the nickel mines base and platinum group metals. So why nickel? I guess we come back to that. Now the nickel price outlook is really strong, with a lot of headroom to spot price versus consensus and our forecast an upward trend. I'll explain. So 2020 two spot price predicted $91 compared to consensus of $49, right? 2024 spot price $297 compared to consensus of $65. So I think that's one of the core drivers of why they actually did want to take over WSI mines. They want, you know, a really they want a larger hold in nickel production. So I guess some core drivers of West Side that we kind of want to go through operation of recovery in the second half of FY21 and beyond. So the scorecard is looking really good with nickel production and sales plus cash trends favourable. They've got two main mines they're focussing on, right, which have have quite positive updates. You've got one the Forrest mania complex. Very cool name. And then you've got number two, the Odyssey complex, which is a new growth project. Again, very exciting. I could go on and on here, but I'm going to probably leave this for another order episode because it's not on WCA.

Candice: [00:08:58] That's right, it's on IJO. And I guess also for our listeners, nickel is another commodity which is key for the EV supply chain, right? So it's interesting. It's definitely interesting that IJO are keen to get more into that space. So let's come back to Aygo. So just give us, I guess, your key points and the big thing, right? Valuation war. We think audio is going to do in the next 12, 24 months. 

Felicity: [00:09:23] Yeah, exactly. So we want to keep this short and sweet. I reiterate a buy for IJO because I really think that it could be the next success story. Think mineral resources off Fortescue, right? Look, you could wait if you want to for a little bit of a sell off before getting in, as some do believe it's overvalued, like I said previously. But I think for long term investors, it's really a screaming buy a one stop stock for every raw material. So really watch this space, you know, they put that, like I said earlier, they did pull off the lithium deal of the decade. They've got the management to do so. So really, who knows what's next for IJO? Sure, price target is $14 now. It's currently trading at around 14 11. So a bit higher than our price target. Consensus is 13 97. So a little bit lower, but most bullish is 1740 and I'm going to go with them. But before I wrap, there's actually a couple of things to note of the next eight days, right? We're going to have a very busy two weeks ahead with almost all of the top 30 miners reporting over the next eight trading days. So that's three results per day. So it's going to be really busy anyway. That's enough for me. We're going to hit Candace top picks from one of our analysts series. But before we do, let's hear from our sponsors. Candace, what is your stock pick for the order? So I'm going to 

Candice: [00:10:38] go with elders from Phillips episode, where he covers a really good in depth into the Australian agriculture and why we can't ignore it. So if you haven't listen, guys head back to that. Reasons being why I like elder is a few things, right? But just coming back to basics. Australian farmers will generate around 81 billion in farm production in 2021 and 2022. That's an increase of about 18 per cent on the prior year. Secondly, around 45 billion will come from this production in mainly wheat and barley and 35 million from livestock. So I think cattle and sheep. So in my opinion and what Philip really eloquently said, this is a really large sector and it's also an essential sector because regardless of what's going on in the world, we all need to eat. We all head home. We all traditionally would sit down at a dining table and maybe have some milk, bread, meat, soy or fruit or vegetables. It's just part of our daily needs. 

Felicity: [00:11:36] That's so true. I love, he said eloquently. Now, agriculture is really an essential product. As we heard from our chat with Phillip, the agricultural sector conditions are currently very strong. What a good pick. Tell us a little bit more about the company. 

Candice: [00:11:49] CB So Elders is an Australian company that actually dates back to 1839. Love that tick. Today, Elders is owned and operated by Australia's leading rural services businesses, so they have a real service pod that's operational side. They supply the physical things, financial advisory inputs and marketing to help Australian and New Zealand farmers realise the best results for their efforts. Elders has actually been listed on the ASX since June 1991, but it was actually called a fruitless corporation under the code FCL. But today it trades under Aldi Typekit, a market cap of about two point two bill, paying a dividend just shy of three per cent.. 

Felicity: [00:12:30] Is it FCL actually Phineas now another one of our picks? 

Candice: [00:12:35] Yes, it is so interesting. Like to they all meet and say, Hey, let's try these ticket names. 

Felicity: [00:12:40] I know what if you thought you were buying, you know, agriculture and you're actually buying tech, how funny? 

Candice: [00:12:45] Well, you know, you were buying it back in the 80s, so it's a little bit out of date now. True Elders is now Aldi, so don't get that confused. All right. Well, give 

Felicity: [00:12:53] us a few key points. Why Aldi actually caught your eye out of all the other businesses, which we covered.

Candice: [00:13:00] I mean, didn't they give us a great insight? I think there was like over 20 stocks mentioned over three episodes, so there was a lot to choose from. But it's a really key business, in my opinion, and the most compelling buy right now for two reasons just for the interest of time. Firstly, farm profitability. So the Australian Bureau of Agricultural Resource Economics and Sciences are actually forecasting that the gross value of the farm production and the net farm cash income is going to peak. Basically, last year, 2021 and this year 2022, and it's going to remain very healthy out until 2026, 2027. So peaking now. Lots of profitability on the table right now, but also a healthy expansion in the next four to five years. So we believe this outlook could actually improve further, given the recent rainfall that we've seen in most of Australia and the level of agricultural commodity prices remaining strong and ramping up for the next few years to come. Secondly, excellent management and strategic planning. This is the real main point that I wanted to jump into. Elders have what they called an eight point plan, an eight point plan. 

Felicity: [00:14:09] Okay, so what does that entail? 

Candice: [00:14:12] It's really a focus on return on capital when you break it down at the end of the day. So a key person to note in the business is Mark Allison. He joined elders as a non-executive director back in 2009. He also served as chairman and executive chairman also, but now his role is managing director and CEO. As of, he's been in that position since May 2014. So he inherited a bit of a rough time. You know, it was a bit difficult periods of quarter on quarter for elders because they had, you know, pretty high levels of debt. Their market share losses was was pretty major in the retail and the agency space, and they had investments in really challenging industries such as forestry and live exports. So Mark and his team introduced this new strategic plan when he took the job in 2014, which is the eight point plan that the aim was back then to achieve an Abbott of 60 million and a return of capital of 20 per cent within three years. So they're all numbers, right? Let's put it in perspective at the time in FY 14, what he inherited was elders actually delivered an underlying Abbott of twenty seven point three million and a return of capital of eleven point seven to 

Felicity: [00:15:20] try and double it, right? 

Candice: [00:15:21] Yeah. And he's basically saying, let's do this in three years. Let's get these big goals out the door. Now, fast forward to FY17. Elders actually more than doubled its underlying Abbott to seventy point four million. He tried to. Set the floor at 60 and more than doubled its return of capital. He actually achieved twenty six point eight.

Felicity: [00:15:40] That's fantastic and you know, you know, but we love that under-promise and overdeliver. 

Candice: [00:15:45] So then management decided to set another three point plan, this time growing underlying it five to 10 per cent per annum, maintaining that 20 per cent return of capital. Lo and behold, what happened? Elders delivered once again, the actual underlying Abbott grew by 19 per cent per annum over the three year period smashed it, including the air acquisition in FY20. The return on capital was actually twenty point two. So again, they really delivered on that three year plan. 

Felicity: [00:16:14] Just for our listeners, I guess benefit. The air acquisition is actually the Australian Independent Rural Retail Acquisition. 

Candice: [00:16:25] Exactly. And more recently, right, because it's it's all about the recent side of things and why elders is a stock that we want to add now. In FY20, elders came back with their third eight point plan, covering from the period FY21 to f y 23. Again, they're saying let's target five to 10 per cent per annum, Ebert and an EPS growth throughout the agricultural cycles at 15 per cent return on capital. So they were 2020 and then 15, and they what they said is the reduced return on capital is largely because of the result, as you just said of the air acquisition, as wholesale carriers generally have lower margins than retail on the agency side of the business. 

Felicity: [00:17:04] Yeah, that's great. Okay, so how far are they on track to meet these updated targets? 

Candice: [00:17:09] Well, in FY21, elders delivered 38 per cent growth in the underlying Ibut and EPS margins and a return of capital of twenty two point five. So, yeah, really, they're smashing it once again, and it all comes down to if I could really wrap it up in a nutshell and say to you, why buy elders now? It's because there's major tailwinds in the ag sector. It's peaking this year and it's looking healthy up until 2026 2027. Plus also, it's a very well-run company with really excellent management that are here to stay really large enough market cap to to be defensive in nature. And it pays a dividend, right? I think it's a bit of a no brainer as elders is really a diversified defensive AG stock. I think we want to own the portfolio.

Felicity: [00:17:54] Tick, tick, tick. Tick. Alright. Well, who are elders biggest competitors? 

Candice: [00:17:58] We've probably got the two main ones that come to your head as GrainCorp and New Farm. 

Felicity: [00:18:03] Okay, and how are they tracking similar to Aldi in their recent reports in the market? 

Candice: [00:18:08] Nufarm go alright, so new farm. Recently in Ferb, they stated that trading conditions are really good. They continue to be favourable. The outlook for soft commodity prices remain positive. Driving increased plantings. So great seasonal conditions. Strong demand in their production products. So they're signalling good times ahead. 

Felicity: [00:18:28] So new farmers should be good for L1 capital, right, as they had quite a large position in this one. All right. What about GrainCorp? 

Candice: [00:18:34] GrainCorp also back in favour of 2020 to announce that expects their FY22 underlying Abrar to be up forty five percent to sixty three versus PCP. So massive, massive, massive numbers for GrainCorp, and they're basically said in their reports. In addition to a second, you know, bumper crop season that we've seen massive global demand for the Australian grain and product is here to stay, and they're going to expect really strong numbers at the latter half of this year. Once again, you know, they've invested into their efficient supply chain, so they didn't feel those Covid constraints like a lot of businesses did. And Australian growers once again are continuously facing many challenges, including floods and wet and interrupted harvest. However, their operational and processing teams continue to work under the heightened Kovic conditions. So basically, GrainCorp and New Farm, you're right. If you look at the channel check and their peers, they're signalling really strong numbers and strong numbers continue. So I think that whole sector is just going to have a nice up. I think that whole sector is going to be really uplifted this year. 

Felicity: [00:19:41] That's good. A nice little boom in the agri sector. Q. Remind us of the price target and, you know, valuation of Aldi. 

Candice: [00:19:47] Yep. So valuation is about two point two billion, like I said, trading around 14 25 per share under the code. Ildy sure place is a price target of 16 50, so that's about 15 and a half percent upside on the current levels that we're quoting at the moment as of 19 of April. And the street place is a consensus of around 14 75. So not a lot of upside from what the street think but fill up like. He said he thinks the market hasn't got this right. You know, they're more focussed on GrainCorp, for example, and the most bull call out there is 17 40. So even more upside than what Shaw think. I honestly think, like you were saying with Aygo, you know, if you look at the sort of 52 week swing of of elders, a lot of value guys and ladies might think, Oh, look, it's already rallied. But if you think. Long term, knowing that the outlook is going to look good for the next three, four, five years, it could honestly be over $17 share price and then happy days. That's the reason I say that. Just to wrap it up is if you look at their track record right there, under-promise and overdeliver. In fact, their net income that they've achieved on an average beat by consensus has been by an margin of 8.6 per cent, and they're a bit beat historically has been 7.2 percent. So what that saying is analysts are undercutting them. 

Felicity: [00:21:04] Isn't that fantastic? So what's also a bit of a coincidence? You've got elders bullish at 17:40 and Aygo bullish at 17:40. Isn't that interesting? So a good pick up. I know, right? Isn't that very interesting? And I think, you know, listening to both of our picks today, you've really got one extremely strong management management that can actually pull off in Argos. Instant, huge M&A and elders management have proven it time and time again. We've also got huge tailwinds in the industry, in the sectors, and we've also got extremely good balance sheets for 

Candice: [00:21:41] both of them. Exactly. And hence why they deserve a spot, not what happened. And just for our listeners, I guess, benefit. We actually don't listen. I don't chat about our stocks before, so we could have both pitched IJO or elders for all we know. And I think it's it's interesting how we both work in different ways, right? Typically, you're more smallcap, more growth. This time you've got more largecap.

Felicity: [00:22:02] They're both defensive. 

Candice: [00:22:03] That's why I think what that signalling in the last couple of episodes we've been talking about is, look, we have had major earning years because of Covid. But the rule book and the state for the gold market changing, we've got inflation, lowest levels of unemployment ever. We have potential housing concerns we need to worry about here in Australia. So I think we want to be a little bit more defensive, right

Felicity: [00:22:26] theme of, you know, I guess, food shortages and evei like, what more could you want? All right. Well, that's a wrap. So we've added IJO and Aldi to the order pad, and we hope you like today's episode. 

Candice: [00:22:37] As always, remember that although Felicity and I are financial advisers, it showroom partners. Please note today's discussion does not constitute as personal financial advice. As always, you should seek professional financial advice before making your investment 

Felicity: [00:22:50] choices and feel free to reach out to us on our social media channels or send us an email which is displayed in the show notes below. Please make sure you follow us on at Talk Money to Me podcast. The daily market updates and a five star review would be fantastic. Until next time

Candice: [00:23:05] love a good five star. Okay, thanks, guys. That's a wrap. See you next time!