Thursday 24 June 2010

Bought Some Elders Shares

Despite swearing I'd never directly invest in shares again (have spent many tedious hours collating my paperwork to work out the capital gains figures for last years tax return - I hate DRPs, share takeovers for script, splits, demergers, bonus issues, SPP etc. - especially when they all happen to the same stock holding over a decade or more!) I couldn't resist buying $5,000 worth of Elders (ELD) shares this morning. Yesterday's "shock announcement" that Elders now expects to make a loss of around $9m this FY instead of the previously projected $45m profit, saw the share price drop 44% yesterday, and another 10% or so this morning before steadying. The CEO made a point of highlighting a cost-cutting process is underway, with a 10% cut in the workforce planned - some top executives were already given the boot this week. The cuts are expected to save $45m a year (although of course the current year will now be impacted by the extra costs of cost-cutting!), which should help the company return to profitability. The CEO also pointed out that the company has $100m cash reserves, so it isn't "going broke" just yet. At the current share price (around 41c) Elders is valued at only $200m, so the cash reserve is considerable. However, the debt to equity ratio is around 250%.

The long-term price chart shows just how "cheap" Elders is at the moment:

Either it will go belly-up (or be taken over at a bargain basement price), or it manage to cut costs and return to profitability. If it manages to make annual profits of $50m again any time soon, then the share price could easily triple. A purely speculative triple-or-nothing sort of investment play. At least it gives me something to watch on the stockmarket - my large parcel of IPE shares is going nowhere fast - stuck around 25c a share when the "book value" of the shares is apparently around 50c. Until market confidence returns, I don't expect the IPE price will rise.

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