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GrainCorp: Focus On FY23 And Capital Return

Australia | Apr 12 2022

This story features GRAINCORP LIMITED. For more info SHARE ANALYSIS: GNC

Following another guidance upgrade by GrainCorp, brokers lift target prices and provide forecasts around capital management.

-GrainCorp benefitting from grain and oilseed demand
-Favourable planting conditions for the winter crop
-Supply disruptions from Ukraine/Russia conflict
-Brokers forecast a return of capital to shareholders


By Mark Woodruff

GrainCorp ((GNC)) has issued its second earnings upgrade in two months on the back of strong global demand for Australian grain and oilseeds.

A large summer grain crop on the east coast, coupled with high grain prices courtesy of trade distortions caused by the Russia/Ukraine conflict is yielding massive margins, observes UBS.

The cash benefit from above-trend earnings in FY21 equates to around $1.20 per share that is likely to be returned to shareholders, estimates Credit Suisse.

The company provides handling, storage, marketing, logistics and agronomic services to the east-coast grain industry, and earnings are leveraged to grain volumes received and exported. These volumes are consequently dependent on seasonal conditions on the east coast of Australia.

Bell Potter notes that planting conditions for the winter crop, undertaken during April to June, are favourable by comparison to uncertainty in other growing regions such as the US and the Mediterranean.

Management’s guidance for FY22 earnings (EBITDA) and profit was 26.5% and 24% in excess of previous consensus forecasts, points out Morgans.

Guidance for total receivals of 16-17Mt and exports of 8.5-9.5Mt for FY22 was unchanged, which leads Morgans to conclude the upgraded guidance for earnings and profit derived largely from Grain Marketing and Processing.

Macquarie lends further credence to this view, by pointing out the Processing segment, which comprises around 18% of the broker’s estimated FY22 group earnings, is performing extremely well. Both Oilseeds and Foods are benefitting from strong global demand for both crude and refined vegetable oils.

Demand for grain has also increased due to recent supply disruptions from the Black Sea, which accounts for around 30% of global wheat exports.

In reaction to the guidance upgrade, Bell Potter, not one of the seven brokers updated daily in the FNArena database, raises its rating to Hold from Sell and increases its target price to $8.85 from $6.70.

Within the database, there are five broker ratings with two Buy ratings and three Hold ratings and a consensus target price of $9.21, which suggests -4% downside to the last share price (following days of rallying).

The effect of the conflict in Ukraine

The conflict in Ukraine, and resulting trade disruptions in the Black Sea region, have created uncertainty in global grain markets, explains Macquarie, with buyers seeking alternative sources of supply.

GrainCorp’s management noted its ports continue to operate at close to full capacity, and this has allowed the company to obtain the benefit of a widening negative basis, which is the difference between Australian and global grain prices.

Morgans points out the uncertainty around the ability of both Ukraine and Russia to grow and export wheat has resulted in an around 30% rally in the wheat price, since the prior company guidance.

Capital management

Without offering an actual answer, Credit Suisse poses the question facing GrainCorp shareholders: run or wait for the money?

The broker includes a special dividend of $1.50/share in its second half forecasts though retains its Hold rating.

The upgraded FY22 guidance increases Morgan Stanley’s conviction the company should be net cash positive at the end of FY22. Barring opportunities for meaningful M&A and sizeable reinvestment, the analyst predicts there will be a return of capital to shareholders.

UBS notes the company announced in November 2021 a buyback of up to $50m in early 2022, and forecasts more than $500m of free cash flow cumulatively over FY22-24. Morgan Stanley points out that for every $50m in share repurchases conducted at the prevailing share price, around 2% EPS accretion ensues.

Outlook for FY23

Macquarie expects earnings momentum to continue into FY23 due to another above-average winter crop, which helps build confidence in grain supplies and further supports export sales and supply chain margins.

UBS agrees and feels FY23 earnings will also be supported by a continuation of the company’s export program from FY22 and value from above-average levels of carry-over grain.

Historically high grain price spreads are likely to remain in the near term, and global demand is unlikely to diminish quickly, acknowledges Wilsons. Nonetheless, new crop grain price spreads are expected to depend on the size of the Australian winter crop and the ability of exporters to secure supply chain access. It’s thought these spreads will significantly impact on FY23 earnings.

The broker, not one of the seven brokers updated daily in the FNArena database, maintains its Market-weight rating and increases its 12-month target price to $7.80 from $7.57.

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