Open for opinion

A technical Analyst's Call!

GrainCorp Limited (ASX: GNC) unveiled its financial projections for the fiscal year 2024 (FY24), maintaining an optimistic outlook despite anticipated challenges. The company forecasts its Underlying Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) to range between $270–$310 million, reflecting a prudent adjustment from the previous fiscal year's exceptional figure of $565 million. Similarly, the projected Underlying Net Profit After Tax (NPAT) expects to range from $65–$95 million, down from the notable $250 million achieved in FY23.

GrainCorp emphasizes that these forecasts align with the company's strategic approach to navigate the return to more typical growing conditions in East Coast Australia (ECA). Despite the moderation in crop volumes and margins from recent peaks, GrainCorp remains well-positioned to capitalize on opportunities in a resilient agricultural landscape. ABARES' forecast of a 21.7 million metric ton (mmt) ECA winter crop for 2023/24, in line with historical averages, underpins this confidence.

Looking ahead, GrainCorp anticipates FY24 receivals of 10.0-11.0mmt and exports ranging between 4.5-5.5mmt, indicating a strategic alignment with market dynamics. The company remains committed to enhancing oilseed crush volumes through operational efficiencies, balancing this against moderated crush margins compared to the previous fiscal year.

GrainCorp's strategic initiatives, including sustainable fuel production collaborations and the establishment of a new crush facility in Western Australia, signal its proactive stance towards future growth opportunities. Moreover, the ongoing business and systems transformation program underscore GrainCorp's commitment to operational excellence and long-term value creation.

While FY24 guidance remains subject to market variables such as grain volumes and export dynamics, GrainCorp's resilience, strategic foresight, and disciplined capital management position it well for sustainable growth.

Valuation and Recommendation

GrainCorp is demonstrating a steadfast commitment to its strategic priorities, as highlighted by its recent endeavours to fortify its core business and explore targeted avenues for growth. The company's acquisition of XF Australia, a prominent provider of feed supplement products and nutritional consulting services, for $35 million underscores its disciplined approach to expansion, particularly in the Animal Nutrition segment.

Moreover, GrainCorp's proactive stance on expanding its oilseed crush capacity, with Western Australia earmarked as a preferred location for a new plant, reflects its forward-thinking strategy and responsiveness to market opportunities. The recently announced renewable fuels initiative with IFM Investors further solidifies GrainCorp's position as a key player in facilitating Australia's transition to renewable energy sources.

Despite regional variations in crop conditions, GrainCorp maintains an optimistic outlook, with ongoing harvests progressing well in key southern growing regions. The company anticipates sustained crush volumes, albeit with moderated margins compared to the previous fiscal year.

From a financial standpoint, GrainCorp presents an attractive investment proposition. With a strong free cash flow yield, low earnings multiple, and a significant dividend payout to shareholders, the stock offers compelling value. Additionally, its low revenue valuation multiple, robust liquidity position, and moderate debt levels further enhance its investment appeal.

GrainCorp's impressive performance over the last twelve months, coupled with a notable price uptick over the last six months and strong returns over the last five years, underscore its resilience and growth potential.

That said, we are issuing a "buy" rating for GNC with an initial target price range of $10.90 to $11 per share, representing a substantial upside potential of approximately 30%, at the time of writing. Additionally, investors can benefit from a steady dividend yield of 3.35%.

GrainCorp Limited – Presentation to the Bell Potter ‘Home Grown’ Agriculture Conference 

This graph jumper out at me. ABARES June forecast for 2023 predicts it to be the 3rd highest crop on record. However, ABARES is very conservative in their guidance, as seen in the graphic below. Their guidance is higher than in June 2022 than it was in 2021 and 2020.

They are guiding for high gain carry out at September 2022, which bodes well for FY2023.

If La Nina holds, 2023 will outdo 2022, and at higher commodity prices assuming current spot prices hold.

Key takeaways from June 7, 2022 national overview:

• National planting to winter crops in 2022–23 is forecast to be the second highest on record at 23.4 million hectares.
• Winter crop production in 2022–23 is forecast to reach the fourth highest on record at 50.9 million tonnes
• Summer crops production in 2021–22 is estimated to reach a new national record of 5.5 million tonnes

According to the latest three-month rainfall outlook (June to August), issued by the Bureau of Meteorology on 26 May 2022, there is a very high chance that cropping regions in the eastern states and South Australia will exceed their median winter rainfall. Western Australian cropping regions are more likely to receive below average winter rainfall.

Winter crop production is forecast to reach 50.9 million tonnes, the fourth highest on record. Yield prospects are forecast to be well above 10-year averages in New South Wales and Queensland and more modestly in other states. High levels of subsoil moisture at the beginning of June and the likelihood of above average winter rainfall in most states are expected to support crop prospects. These forecasts assume average seasonal conditions in spring because Bureau of Meteorology outlook for spring is not yet available.

High costs of fertilisers and chemicals have caused growers to economise on their use planting and establishing crops, with the majority of growers securing sufficient volumes earlier in the year. While the cost and availability of chemicals are expected to be less of a constraint to production prospects, there is some risk that a tighter than expected rationing of fertilisers on farms in spring could reduce yield potentials. However, this downside risk is expected to be limited by the scale and specialist operations of large farms producing the majority of production in Australia, and their tendencies to hold adequate fertiliser stocks to maximise their returns to deploying farm machineries.

Wheat production is forecast to increase 22% above 10-year averages to reach 30.3 million tonnes, the fourth largest on record. Barley production is forecast to reach 10.9 million tonnes, also the fourth largest on record. Canola production is forecast to increase 47% above 10-year averages to total 5.6 million tonnes, the second largest on record.

DISC - HELD.

Late on Friday, Graincorp released a buyback notification, advising that up to 10% (22.9 m shares) of the shares issued will be brought back via on-market transactions before November 10.

372k of shares were brought back on the 2/6/2022 on the first day of the buy back period.

DISC - I HOLD

Key takeaways:

1. NPAT of $246 M, up from $50.5 million in pcp.
2. Grain handled: 38 MT (up 25%)
3. Contracted grain sales: 5.8 MT (up 0.3 M T)
4. Exports: 4.5 MT (up from 3.1 MT) - exports running at close to full capacity.
5. Hedge payment of $70 million included. This means H2 is unhedged, enabling GNC to realise the benefits of high grain prices.
6. Inventory and working capital financing increased significantly as a result of high commodity pricing and record grain volumes.
7. CAPEX forecast to increase to fund increased storage capacity.
8. Interim and special dividend of 24 cents per share combined. Shre buy back ongoing ($50 million)

GUIDANCE:

• FY2022 Underlying NPAT: $310-370 million.
• FY2023 outlook: Positive conditions for FY2023 Winter crop, at a time of ongoing Northern hemisphere supply chain disruption.

From Reuters:

• SEES EXPECTED RANGE FOR FY22 UNDERLYING EBITDA IS INCREASED TO A$590-670 MILLION
• EXPECTS FY22 UNDERLYING NPAT TO A$310 MILLION-A$370 MILLION
• RECENT WEATHER PATTERNS AND CONTINUED LA NINA CONDITIONS HAVE PROVIDED EXCELLENT PLANTING CONDITIONS FOR 2022 WINTER CROP TO DATE
• DESPITE RECENT WEATHER-RELATED SUPPLY CHAIN DISRUPTIONS ACROSS EAST COAST AUSTRALIA, CONTINUING TO OPERATE PORTS AT CLOSE TO FULL CAPACITY
• CONFLICT IN UKRAINE AND RESULTING TRADE DISRUPTIONS IN BLACK SEA REGION HAVE CREATED UNCERTAINTY IN GLOBAL GRAIN MARKETS
• CONFLICT IN UKRAINE AND RESULTING TRADE DISRUPTIONS IN BLACK SEA HAS FURTHER INCREASED DEMAND FOR AUSTRALIAN GRAIN AND OILSEEDS

DISC: Sold on the spike when it hit my sell order at $9.40 IRL. I think the share price went ahead of itself at 9.35+.

Underlying NPAT upgraded from $235-280 M to $310-370 M. That is about a 30% upgrade.

The upgrade is attributable to increased demand for Australian grain and oilseeds, and favourable planting conditions for winter crops.

“The conflict in Ukraine and resulting trade disruptions in the Black Sea region have created uncertainty in global grain markets, with buyers looking for alternate sources of supply. This has further increased both the demand for Australian grain and oilseeds and export supply chain margins.” 

“Recent weather patterns and continued La Nina conditions have provided excellent planting conditions for the 2022 winter crop to date, building confidence in grain supplies from ECA and further supporting export sales and supply chain margins.” 

“Despite recent weather-related supply chain disruptions across the ECA, we are continuing to operate our ports at close to full capacity, exporting as much grain as possible to international markets. Our supply chain resilience demonstrates the value of our infrastructure assets and is testament to the capability of our operations and 

planning teams,” Mr Spurway said. 

DISC - HELD

I nearly bought graincorp at the outset of the war. But then discovered they had a significant business in Ukraine. Sadly I didn’t really have enough time to find out how significant: would the rise in grain and seed pil prices be greater than the loss of business they had in Ukraine?

I didn’t want to make the same error of first order thinking I made buying funeral companies at the beginning of COVID. As a reminder, funerals were limited to like 3 people so IVC ended losing money, not being a beneficiary of a huge increase in mortality. (Yeah, I know, I feel like a vulture now)

Anyway, I still don’t know whether GrainCorp is a good buy now, but absolutely lost the opportunity back when it was 30% cheaper!