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GrainCorp Looks Long-Term to Deliver Growth

Australia | Jun 28 2022

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

While supportive macro conditions drive a strong near-term outlook for GrainCorp, the company is focused on longer-term growth initiatives.

-Investment in long-term innovation safeguards GrainCorp’s future
-Supportive macro conditions allow the company to set sights on long-term growth opportunities
-Favourable crop conditions and tight global grain supply should support core business near-term

By Danielle Austin

Brokers have highlighted a focus on long-term growth initiatives as a key takeaway from GrainCorp’s ((GNC)) recent investor day, with the company highlighting an investment focus across digital agricultural technology, alternative proteins, grower services, animal nutrition and agricultural energy.

Market analysts are largely in agreement these growth initiatives, alongside current favourable macro conditions, will strengthen GrainCorp’s core business and provide a platform for sizeable long-term growth.

The company has announced its intention to spend up to -$30m in agricultural technology over the next three years through its recently launched GrainCorp Ventures fund, as well as investing in an ag-tech start up that tests grain, social and crop samples.

GrainCorp has also committed -$4.4m to a collaboration with the CSIRO and v2food to investigate alternative plant-based proteins, and has secured a partnership with a plant-based protein producer to support innovation into new products utilising plant-based meat flavoured shortenings.

The company highlighted all areas of strategic growth were underpinned by strong sustainability themes, and with GrainCorp continuing to partner with growers and connecting them to domestic and global marketplaces, analysts have noted the company is well-positioned to provide sustainable solutions across the sector.

Macro conditions leave company well-positioned for inflationary impacts

Macro conditions continue to be supportive for GrainCorp, and brokers anticipate the company will continue to benefit from trends for a number of years, with global grain supply at its tightest level in two decades as the Russian-Ukraine tension constrains the market.

In addition, domestic crop conditions remain favourable, and could be supportive of upgrades to East Coast Australia crop forecasts in 2022 and 2023 according to analysts, which would support earnings in FY23 and FY24. Broadly taken, GrainCorp is seen as well-positioned for the current inflationary economic environment given its ability to pass through supply chain costs to grain prices.

It is also largely assumed by analysts that GrainCorp will be able to continue capital management, with the company so far buying back 2.4m shares under a $50m buyback initiative.

The four broker’s within FNArena’s database coverage to release a recent update on GrainCorp have an average target price of $9.70. Analysts from Macquarie expect GrainCorp’s growth strategy to support a lift in return on invested capital to 11.1% in FY21 and 25.7% in early FY22, up from 1.6% in FY20. The analysts noted GrainCorp reaffirmed full year earnings guidance of $590-670m, as well as full year net profit of $310-370m, noting guidance reflects the current strong global demand for Australian grain, oilseeds and vegetable oils.

Macquarie anticipates earnings momentum to continue into FY23 as favourable conditions on the east coast look likely to support a third consecutive above-average winter crop, and as the company continues to benefit from the Russia-Ukraine conflict. The latter continues to place pressure on the global grain market given the countries account for 29% of the global wheat market, for at least the next two years. With a target price of $11.10, Macquarie is the only broker within coverage to be Outperform rated on GrainCorp.

UBS highlighted full year guidance could prove conservative if global grain supply does remain constrained for a prolonged time. It was highlighted that in addition to a likely above-average crop, GrainCorp’s FY23 results should further benefit from a continuation of the company’s export program, above-average carry over, and above-average crushing margins. While the broker currently forecasts FY23 earnings to decline -32% on FY22, it notes an upside scenario could see FY23 results similar or in excess of FY22. UBS holds a Neutral rating and a target price of $10.00.

Describing GrainCorp as likely to be considered a good offset to earnings volatility elsewhere in the market, Credit Suisse notes the company’s strong financial position and likely further capital management in FY22 and FY23 should sweeten the deal for investors. The Credit Suisse analysts are anticipating above trend earnings to continue through to FY24. Credit Suisse holds a Neutral rating and a target price of $8.91.

While positive on the significant long-term opportunity GrainCorp’s growth strategy should provide, analysts from Wilsons note initiatives currently remain at an early stage, and are more intangible in nature than the company’s core business.

The broker assumes elevated earnings and cashflow through to FY24 will drive the company to a net cash position of $410m in that year, which will support ongoing growth opportunities or capital management.

Assumptions of a larger east coast crop in FY23 also drives Wilsons to reduce its FY23 earnings per share forecast -8.3%, but increase its FY24 forecast by 46%. Wilsons holds a Market Weight rating and a target price of $8.80.

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