Straws are discrete research notes that relate to a particular aspect of the company. Grouped under #hashtags, they are ranked by votes.
A good Straw offers a clear and concise perspective on the company and its prospects.
Please visit the forums tab for general discussion.
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:
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:
GUIDANCE:
Graincorp's profitability is highly reliant on variables outside it's control, such as the weather and grain prices. The Eastern seaboard medium term weather cycle in La Nina to Neutral, the weather outlook looks positive for the next 18 months, on the back of record grain production hitting the silos in recent months (6% above previous record).
Grain prices have recently rocketed higher, ABARE prices for Milling Wheat have reached all time highs of $581 per tonne. Should the Ukraine war continue for another month, grain prices are likely to surge, with supply chain disruption in the black sea (30% of global exports), coinciding with below par North American harvests.
I have changed my assumption regarding GNC profits, as wheat prices are likely to remain high for extended period - longer than I previously thought possible, For this reason, I revised the terminal PER upwards to 7.5. Assuming a 2022 Adj. NPAT of $370 Million, adj. EPS is: $1.60 per share. Using a PER of 7.5, I come up with a valuation of $12.00 per share. $370 million was the upper upper bound of their recent upgrade, but wheat prices have subsequently increased since this announcement, this is why I am using the upper end of guidance for my short term valuation.
Downside risks:
1) La nina peters out over the next 12 months, leading to a drought.
2) Ukraine war is resolved within weeks, prior to harvest season.
3) fertiliser shortages inhibit production in 2023.
GNC is a sell if items 1 or 2 occur.
DISC - I HOLD
From Reuters:
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!