Australia | May 19 2020
Graincorp is a much simpler business, having divested two divisions in the first half, and now looks forward to a better winter harvest and less volatile earnings profile.
-Higher grain exports expected in the second half
-Earnings carry a first-half bias, reflecting timing of receipts
-Chinese barley tariffs may weigh on share price
By Eva Brocklehurst
Benefits of the recent divestments and operating improvements were evident in Graincorp's ((GNC)) first half, albeit this was a messy result. Improvements were driven by higher grain throughput, a new rail contract and better grain marketing.
Still, Morgans also points out there were material one-off items and the company has just cycled a very weak comparable period when every business unit fell short of of expectations.
Management expects higher grain exports in the second half as well as a continuation of favourable crush margins. Receivables in the first half increased 65% and underlying net profit improved to $55m amid the benefits from crop protection contracts and better oilseed crush margins.
The company's earnings have always been seasonally skewed to the first half, in line with the winter grain harvest, and from now on neither the malt business nor liquid terminals operation will be included in second half earnings, given divestment.
All divisions reported above forecasts, and Macquarie anticipates lower grain transfers to the eastern ports, as domestic demand is likely to ease amid expectations for a stronger crop. As the business is defined as an essential service it has been resilient throughout the coronavirus pandemic, playing a role in supporting the food supply chain both in Australia and globally.
The broker considers the trading issues in the previous year are now behind Graincorp and a solid balance sheet provides growth options, likely to be about partnerships and the extension of existing business, while large acquisitions are considered unlikely.
The company provided no formal earnings guidance but has acknowledged earnings are likely to carry a first half bias, reflecting the timing of payments and crop receipts.
Hence, the first half is not a true reflection of the full year performance, Morgans argues, as the second half will be loss-making. While company has a net cash position, it reflects the skew to the first half and the crop protection payment.
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, upgrades to Market Weight from Underweight with a target of $3.81. The recovery in crush margins was quicker than the broker expected, despite the summer crop being below normal.
There was also a stronger than expected contribution from the trading book. Going forward, with a more robust earnings profile, which should enable the payment of dividends, the broker envisages a more constructive investment case.
Seasonal conditions in most east coast grain growing regions are now more favourable and there are good prospects for the winter crop. Oilseed crush margins are expected to remain favourable because of the prevailing prices for canola oil and meal.
Furthermore, UBS assesses the standalone entity now has leverage to a cyclical upswing, after three drought-affected years. The balance sheet is de-risked and volatility has been eased via the grain derivative.
Still, the broker accepts the nature of the company's business makes forecasting highly uncertain although estimates potential operating earnings in FY21 of $156-191m.
Credit Suisse assesses the company's funding position is now attractive and free cash flow should run materially ahead of earnings, expecting a 22mt winter crop. An average year is around 18mt and, at this stage, Morgans forecasts a 20mt crop for the east coast, 18mt in winter and 2mt in summer.