Australia | Sep 09 2020
ABARES has upgraded its forecasts for the Australian east coast winter crop, which points to a more robust outlook for grain handler and processor Graincorp.
-Upside earnings potential beyond a 24mt winter harvest
-Graincorp likely to be loss-making in second half of FY20
-Strong rise in exportable surplus likely
By Eva Brocklehurst
After some savage weather conditions over the past year, grain handler Graincorp ((GNC)) is facing a much more pleasant outlook and brokers are counting the beans.
Official agricultural forecaster, ABARES, has upgraded its east coast winter crop outlook to 24.4mt. This is an upward revision of 13% on the initial estimate in June and represents the largest crop since the 2016/17 season.
A significant turnaround in the amount of rainfall received in south-eastern Australia at the start of 2020 has contributed to favourable seasonal conditions. The size of the crop will not be known until harvesting in November-December, and Morgans points out rainfall at harvest could negatively impact quality.
There is also potential for the first "decent" summer crop in five years, the broker notes, as the first forecast for the 2020/21 summer crop is 3.5mt, up 290%. Summer harvests occur between February and June.
Moreover, a larger canola crop, where production is forecast to rise 47%, is a positive for Graincorp's processing business. Greater volume should improve the crush margins, Morgans notes. That said, while Graincorp will incur a lower price for the canola seed and reduced freight costs, its end-sale prices for meal and oils are currently unknown and will be determined by the international market.
Goldman Sachs reduces forecasts for marketing operating earnings (EBITDA) in FY21 by -7%, amid trade disruptions, and allowing for lower crush margin assumptions.
Morgans also points out that in FY21 the processing business will have a difficult comparable to cycle as operating conditions were ideal in FY20.
The company has not provided earnings guidance for FY20 and the broker highlights that agribusiness earnings and tonnage are seasonally skewed to the first half. Morgans forecasts Graincorp will be loss-making in the second half and will be retaining a modest net debt position. Graincorp will report its FY20 results on November 12.
Macquarie considers there is further upside to ABARE's winter crop estimate, with its analysis pointing to the potential for 25.6-27.3mt by June next year. UBS highlights a stronger earnings leverage that exists for a crop that is over 24mt as Graincorp's derivative payment is maximised at this level.
Graincorp received a payment of $58m in FY20, reflecting another below-average winter crop. The company will have to pay its insurer $76m gross in FY21 under the crop production contract based on this current estimate.
In a scenario where the FY21 crop is similar to the FY17 "bumper crop" of around 28mt, UBS estimates an operating earnings potential for the agribusiness segment of $190m. In turn, this implies a valuation at $6.40 per share compared with the UBS target of $4.50.