Upgrade Cycle Continues For GrainCorp

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While brokers have revised their forecasts in line with Graincorp’s updated guidance, they believe there still is further upside if seasonal conditions remain favourable.

-GrainCorp management expects FY21 earnings at $255-285m
-Widespread rainfall since Feb’20 has resulted in the largest east coast winter crop on record in 2020/21
-Goldman Sachs sees room for re-rating as the market better appreciates the sustainability of the group’s earnings initiatives

By Mark Story

Following a big harvest and strong grain prices that saw GrainCorp ((GNC)) upgrade its through-the-cycle earnings estimate in March from $200m to $240m, brokers continue their own earnings upgrade story on the stock, with some looking for double-digit upgrades to FY21 forecasts.

Driven by the Agriproducts segment, where significantly higher grain volumes and favourable trading conditions offset a reversal in the Crop Production Contract (CPC) payment, GrainCorp’s 1H21 (normalised) net profit of $47.7m increased 181% on the previous period, well above most brokers’ forecasts. Aided by lower depreciation and amortisation and interest expense, earnings (EBITDA) also increased 42% on the previous period.

Despite a -$70m payment to its insurer regarding a crop production contract, agribusiness earnings (EBITDA) were up 52% at half year, while processing reported earnings (EBITDA) of $24m were slightly stronger than brokers had expected.

Overall, key numbers within the half-yearly result included revenue of $2,563m up 31% year-on-year, underlying profit of $50.5m compared to $26.9m in the previous period, and lease adjusted operating cash inflow of $60.3m compared to an inflow of $39.4m in the first half last year.

The board declared an interim dividend of 8cps (fully franked).

Goldman Sachs believes GrainCorp’s first half result highlights the significant progress the company has made towards improving through-the-cycle earnings power post the United Malt Group ((UMG)) demerger (of which it now owns 10%).

Wilsons expects elevated earnings and cash flow over the next two years to put GrainCorp’s balance sheet into a core net cash position, providing some internal funding capacity for investment in growth opportunities.

Skewed performance

Morgans reminds investors that crop production contract and the record crop is altering the company’s historical first half earnings skew. For example, FY21 guidance implies second half 2021 underlying earnings (EBITDA) of between $115-145m versus $3.0m in 2H20.

Historically, the group’s earnings have been seasonally skewed to the first half in line with the winter grain harvest. Similarly, processing earnings are also typically skewed to the first half, with the second half incurring plant shutdowns (as the season ends).

GrainCorp cautioned the crop production contract (falling in 1H) is now making it difficult to assess the business on its 6-month performance. Morgans expect the larger crop and materially greater export task – which is skewed to the second half in FY21 – is also a driving factor behind the anticipation of a stronger second half FY21 result.

Morgans also notes the processing business is forecast to have a much stronger second half FY21 as the company benefits from strong crush margins.

Upgrades continue

With strong margins reflecting high global demand for Australian grain and oilseeds, the first half result was also accompanied with upgraded guidance. Management now expects FY21 earnings (EBITDA) at $255-285m (previously $230-270m) and net profit at $80-105m (previously $60-85m).

Underscoring management’s robust outlook is widespread rainfall across the east coast of Australia since February 2020 replenished soil moisture and water storages. This has resulted in the largest east coast winter crop on record in 2020/21.

Macquarie expects these conditions to support agricultural production in 2021/22, with rainfall received over summer and autumn across the cropping areas on the east coast providing a good foundation for crop establishment and early growth.

Given soil moisture profiles and rainfall pre-planting across many parts of the east coast, Macquarie believes the winter crop is shaping up to be above average. But due to being at full capacity across the export network, GrainCorp has reduced its export assumption for this year by 0.5mmt.

Macquarie expects this to provide a comparative lift to grain carry out into FY22 which benefits through additional storage revenue. The broker also expects it to support a good start to exports in FY22, with higher exports being margin accretive.

Supported by a grain carry-in benefit, good soil moisture profile built up over the past year, plus a favourable outlook for the processing business and other growth options, Macquarie raises FY21 earnings per share (EPS) by 22% and FY22 and FY23 by 5% and 1% respectively. As a result, the broker maintains an Outperform rating on the stock, with the price target increasing to $6.66 from $6.01.

Including the remaining $40m of self-help benefits to be achieved by FY23/24, Goldman Sachs also believes Graincorp’s through-the-cycle earnings (EBITDA) guidance of $240m is achievable. The broker’s FY25 earning (EBITDA) forecast of $240m is composed of: $187m in agribusiness earnings, $53m in processing earnings, and -$15m in corporate costs.

The broker sees room for GrainCorp to re-rate as the market better appreciates the sustainability of the group’s earnings initiatives, and reiterates a Buy rating, with the target price of $6.45 representing circa 19% upside from last week's share price.

Based on increased guidance for carry-over grain from FY21 (3.5-4.5mt, from 2.5-3.5mt), UBS has lifted estimated FY22 earnings (EBITDA) 7%, but believes significant upside still exists. UBS forecasts over $400m of free cash flow generation cumulatively over FY21-23, with GrainCorp further targeting cash generation of $50m over FY21-23 from the sale of non-operational assets.

The broker maintains a Buy rating on the stock, with the target price increasing to $6.70 from $6.60.

Crop outlook

Rainfall through March was 56% above average, with NSW having the second wettest March on record. This was followed up with April being 43% below average and NSW recording the eight driest on record.

Meantime, soil moisture profiles remain above average across the majority of the east coast acreage and the three month rainfall outlook remains above average.  Bell Potter’s forecasts for the FY22 crop remain unchanged at this stage and comparable with the level projected at the of the June 2020 crop report.

Bell Potter’s target price of $6.20 is based on normalised east coast crop production of 19.0-20.0mt (east coast winter + sorghum) and returns the broker expects the grain and oilseeds business to generate in that year.

Given the material move in commodity values post balance, Bell Potter sees an upside bias remaining to FY21 earnings. The broker also sees the prospect of two consecutive above average crops having the scope to de-risk earnings and cashflow through FY23.

As a result, Bell Potter has upgraded net profit forecasts by 16% in FY21, 2% in FY22 and 8% in FY23.

While Morgans awaits ABARES initial forecast for the upcoming winter crop on 8 June before adjusting assumption of an average 2021/22 season, the broker has made large upgrades to FY21 forecasts. The FY21 earnings (EBITDA) forecast has gone up 8% to $270m and the net profit forecast 21% to $94.6m.

While Morgans' FY24 earnings (EBITDA) forecast is in line with GrainCorp’s ‘through-the-cycle’ earnings target of $240m, the broker believes there is upside to FY22 forecasts if seasonal conditions remain favourable.

Morgans has an Add rating on GrainCorp, with the target price increasing to $6.28 from $6.17.

UBS also intends to wait for ABARES' first FY22 crop estimate before considering a more positive view on FY22 earnings. But under a similar crop size as FY21 (around 30mt), the broker would expect FY22 earnings (EBITDA) to grow meaningfully (to over $300m), especially given the benefit of carry-over grain, plus export delays flowing into FY22.

Only four of the seven stockbrokers monitored daily by FNArena are currently covering GrainCorp. All four of Credit Suisse, UBS, Macquarie and Morgans have set price targets above today's share price with the average of these four price targets at $6.29, which compares with Friday's closing share price of $5.30.

Based on the forecasts by these four brokers, GrainCorp shares are currently offering a dividend yield of 3.8% and 4.2% respectively for FY21 and FY22.

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