GrainCorp: ABARES upgrades the crop again

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
01 December 2021, 8:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • ABARES (Australian Bureau of Agricultural and Resource Economics) has upgraded both its 2021/22 winter and summer crop forecasts (FY22 earnings). ABARES forecast implies an east coast grain crop which is slightly lower than the FY21 record crop. However, going by past practice, there is still the potential that ABARES could upgrade the crop again with its next update in March.
  • In our last report, we moved ahead of ABARES forecast and made material upgrades to FY22 earnings. We expect that consensus will now follow suit. Another bumper crop means that GNC will have well above average carry-over grain going into FY23 and this has seen us make material upgrades to our earnings forecast in this particular year.
  • Given the upgrade cycle is still intact, we maintain an Add rating with a new price target of (login to view).

Event: ABARES Australian Crop report – upgrades once again

As expected, ABARES has again upgraded its 2021/22 winter and summer crop forecasts from its September estimate given the continued favourable seasonal conditions.

Analysis: Expecting another bumper grain crop in 2021/22

Most relevant to GNC’s receivals (wheat, barley, canola, chickpeas), ABARES east coast 2021/22 (FY22) winter grain crop forecast has been upgraded to 27.4mt (was 25.0mt). While this is down slightly from 28.4mt in the pcp, it is ~66% above an average season of about 16.5mt. As of yesterday, ~4.6mt of grain has already been received by GNC.

Given excessive rainfall has delayed harvest, we expect harvest to now conclude by the end of January. While some of the crop has been downgraded to feed quality from the rain (removes protein levels), we note that this doesn’t materially impact GNC’s volumes or earnings. However, it will result in the grower receiving a lower price for their grain.

ABARES has also upgraded its summer sorghum crop to 2.0mt, up from its last forecast of 1.7mt. This was in line with our previous forecast.

Forecast changes and outlook commentary

In regards to the crop production contract (includes some other crops), ABARES has upgraded its forecast to 29.1mt, up from 26.5mt previously. Above 19.3mt, GNC pays away A$15/t to the insurance company. This size crop means that GNC will need to pay the insurer A$70m (plus A$6m cost) which comes straight off EBITDA. Our FY22 forecast already made this assumption.

GNC will provide formal FY22 earnings guidance at its AGM in February when there is more certainty post-harvest. Despite expectations of a slightly lower crop in FY22, we forecast GNC’s earnings to be higher than FY21 given stronger than average carry-in grain of 4.3mt and strong margins are expected given the strong demand for Australian grain.

Additionally, a larger canola crop and high vegetable oil prices are expected to keep crush margins elevated into the 1H22.

As we saw in FY21, with another bumper year in FY22 and minimal core debt (excludes commodity inventory), we would not be surprised if there was further capital management initiatives in FY22.

Given we had already assumed a full export program for FY22, the additional volume from ABARES update will support strong carry-over grain into FY23 (MorgansF is now 5.5mt vs 3.8mt previously). The well above average carry-over grain will again boost GNC’s exports in FY23 (high margin work). This has seen us upgrade our FY23 EBITDA forecast by 15.5% and NPAT by 31.1%.

The latest three-month rainfall outlook (December to February) by the Bureau of Meteorology (BOM) suggests that rainfall is likely to be above average for eastern Australia, particularly NSW and QLD. In fact, La Nina was recently formally declared.

While some of the summer crop has been lost, the BOM’s outlook should underpin decent subsoil moisture levels leading into the next winter crop with planting starting in April 2022. Given it is too early to predict, at this stage, in FY23 we assume an average size crop until we know otherwise.

Investment view

Our SOTP valuation has risen to (login to view). With another bumper crop on the way, carry-over benefits and clear strategic initiatives in place to improve its ‘through-the-cycle’ earnings and ROIC, we think GNC is well placed and maintain an Add rating.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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