Dry Season Pressuring Graincorp’s Outlook

Australia | Sep 13 2017

Following below-average winter rainfall, ABARES has revised its winter crop forecast and brokers evaluate the implications for Graincorp.

-Despite downgrades, potential still exists for a reasonable FY18 result
-Share price may not yet be fully reflecting the deteriorating conditions
-Smaller crop to result in increased competition for a smaller grain pool


By Eva Brocklehurst

Following below-average winter rainfall, ABARES has revised its winter crop forecast for wheat, barley, canola, sorghum and chickpeas. The prospect of a below-average crop has resulted in brokers reviewing the outlook for Graincorp ((GNC)).

The ABARES quarterly crop update may have been above many forecasts, because of a 16% upgrade to Victorian yield expectations, but in contrast, NSW and Queensland were below estimates, reinforcing suspicions of negligible grain exports from those states in 2018.

Credit Suisse, in recognising the tendency for crops to be downgraded as an average, or dry, season progresses, sets its Victorian forecast at a 50 percentile yield versus around 60 in the ABARES forecasts. The ABARES east coast crop forecast for 2017/18 is 18.7mt. This is down -6% on the June estimates.

Reflecting bearish expectations heading into the update from ABARES, the broker observes the stock market reacted quite favourably. Moreover, noting Graincorp is trading towards the lower end of its typical $8-10/share trading range and there little structural change to earnings, Credit Suisse suggests a near-term seasonal downgrade may present an opportunity.

Graincorp's market share in FY16, a similar sized crop year, was about 42%. In applying this to FY18 forecasts, Morgans calculates total grain receivables of 7.8mt, down from 13.7mt in FY17 and prior forecasts of 9.0mt. The broker hastens to highlight that this is not without risk, and the forecast is based on there being sufficient, and timely, spring rainfall across Australia's cropping regions.

While believing Graincorp remains on track to deliver FY17 earnings guidance, the broker reduces forecasts because of a slowing in fourth-quarter activity as, given concerns over the current crop, farmers have either decided to hold their stocks on-farm or sell into the domestic market to capture a premium price compared to that on offer in the export market.

Morgans downgrades FY18 forecasts to reflect the ABARES revisions and the impact of reduced grain volumes on the company's marketing businesses. The broker also revises down forecasts for oils & malt, to reflect higher electricity prices and an elevated Australian dollar. All up, FY18 net profit is forecast to be down -33.5%, at $100m.

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