- Graincorp's (GNC) FY18 underlying EBITDA guidance was weaker than expected, while NPAT guidance was better thanks to a tax benefit. Given GNC's high fixed costs, margins get crunched in a below average year.
- Despite slight EBITDA downgrades, our NPAT forecast in FY18 has risen and FY19 and FY20 remain unchanged due to the lower tax rate in the US.
- Historically, the time to buy GNC has been in poor years when the stock is trading at a material discount to its average season valuation. Patient investors have then been well rewarded when better seasons arise.
FY18 guidance reflects a small crop and competitive pressures
Underlying EBITDA guidance is A$240-265m, down from A$390.1m in FY17A. The mid-point was well below consensus expectations of A$295.0m and slightly below our previous forecast of A$266.6m. The difference to our forecasts reflects lower than average exported grain export guidance. GNC's export competitiveness has been impacted from high global grain supplies (depressing international grain prices), in combination with Australia's high domestic grain prices (below average crop has resulted in a drought premium).
For the storage business, we note that competitive pressures increase in small crop years as domestic demand takes priority. Given GNC's high fixed costs, margins get crunched in a below average year. Malt and Oils earnings are expected to increase. Operating NPAT guidance is A$50-70m, down from A$141.6m in FY17A. This guidance includes an A$18m tax benefit due to the effect of the lower US corporate tax rate of 21% on GNC's deferred tax liability. Moving forward, GNC's tax rate is likely to fall to 27-28% compared to c30% previously.
The mid-point of NPAT guidance was above our previous forecast of A$55m, however it was below consensus of A$78.0m.
Our EBITDA forecasts have fallen by 5.3% in FY18, 1.5% in FY19 and 1.7% in FY20. Due to the tax benefit, our FY18 NPAT forecast has risen by 14.9%. Our NPAT forecasts over FY19 and FY20 remain unchanged as the lower tax rate offsets the minor EBITDA downgrades. At this early stage, we assume an average season crop in FY19 and FY20 until we know otherwise. However FY19 will be impacted by below average carryover grain due to the small crop in FY18.
GNC continues to target net (pre-tax) benefits of A$25-30m over two years from the restructuring of its Grains and Oils businesses. Realising the benefits from recent capital projects remains a priority and GNC continues to review its portfolio with the opportunity to divest non-core assets.
While guidance may disappoint, most should have looked beyond FY18 given the small east coast grain crop and difficult export conditions. Historically, the time to buy Graincorp has been in poor years when the stock is trading at a material discount to its average season valuation. Patient investors have then been well rewarded when better seasons arise.
We retain our Add recommendation.
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