GrainCorp: Upgrade cycle isn’t over yet

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
12 November 2021, 9:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • GrainCorp's (ASX:GNC) FY21 result beat the top end of its EBITDA guidance range benefitting from a record east coast grain crop, strong demand for Australian grains, a record Processing result and its strategic initiatives.
  • Importantly outlook comments were upbeat as another above average crop and carry over grain from FY21, along with continued strong margins across Agribusiness and Processing will benefit FY22. We have moved ahead of ABARES grain forecast given we think it will be upgraded on 30 November. This has resulted in material upgrades to our FY22 and FY23 forecasts.
  • Given the upgrade cycle is still intact, we maintain an Add rating on GNC with a new price target of (login to view). While only modest, we think GNC’s share buyback reflects not only the strength of the company’s balance sheet (minimal core debt) but the Board’s confidence in its future.

Event: FY21 result beat expectations even after two upgrades during the year

EBITDA was A$330.8m, up 206% on the pcp and beat the top end of guidance of A$310-330m. NPAT was A$139.3m (vs loss of A$15.9m in the pcp) and at the upper end of guidance of A$125-140m.

A final dividend of 10cps ff was announced along with a A$50m on-market share buyback (~3% of issued capital).

Solid result across the board; GNC is a much better business than in the past

The result benefited from a record east coast grain crop with ECA receivals (16.5mt vs 4.2mt the pcp) and strong global demand for Australian grain and vegetable oils (especially given crop production challenges in the northern hemisphere).

Given the bumper crop, the crop production contract reduced earnings by a net A$65m. Earnings were also supported by GNC’s strategic initiatives.

The Processing business materially beat expectations (EBITDA of A$77.7m, up 71%) benefiting from high utilisation of its oilseed crush facilities following a larger canola crop and high crush margins given the strong demand for canola oil.

GNC’s operational initiatives have now delivered over A$100m of additional EBITDA. In our view, GNC has won market share, has improved its engagement and relevance with growers and is running its entire supply chain more effectively (capturing more of the margin).

GNC’s improved performance along with favourable industry tailwinds is evident by the uplift in its FY21 EBITDA of approx. A$170m compared to the last big volume year in FY17.

In line with the large crop size, net debt rose to A$599.2m vs. A$239.2m the pcp. However, GNC core gearing metric or core debt (excludes commodity inventory) was only A$1.2m vs A$37.1m the pcp. Throughout the year, GNC continued to invest in its network and key growth areas of animal nutrition, alternative protein and AgTech.

Management’s FY22 outlook commentary was upbeat

GNC will provide FY22 earnings guidance in February at its AGM when there is more certainty post-harvest. However GNC is expecting the 2021/22 crop to be well above average.

It will also benefit from above average carry over grain of 4.3mt from FY21. This will provide a significant earnings tailwind in FY22. It means that GNC can start exporting grain which is its highest margin work from day one of the new financial year, whereas in FY21 it had to wait two months until the crop came in.

Additionally, it has increased its fees by 3-4%. Importantly, strong margins are expected to continue in FY22 given the strong demand for Australian grain. High vegetable oil prices are expected to keep crush margins elevated into the 1H22.

Forecast changes

Another bumper crop, 4.3mt of carryover grain and maintaining strong structural margins, means that FY22 earnings should be well above FY21. Our new FY22 EBITDA and NPAT forecasts have been upgraded by 15.9% and 24.3% respectively.

Our new crop forecast is above ABARES. Another big crop in FY22 should also see above average carry-over grain assist FY23 earnings.

Investment view

Reflecting earnings upgrades and higher multiples, our SOTP valuation has risen to (login to view).

Given the favourable operating outlook and the underlying improvements management is making to the business, we maintain an Add rating. The next catalyst for the stock is ABARES Crop report on 30 November.

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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.

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