GrainCorp: FY22 as good as it gets?
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 11 August 2022, 8:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- GrainCorp (ASX:GNC) has again upgraded guidance with the midpoint 5.3% ahead of consensus, reflecting a strong 4Q given increased grain coming into its system as growers sold on-farm stocks in preparation for harvesting another bumper winter crop in FY23.
- The near perfect conditions which FY22 benefitted from have reverted in recent weeks with global wheat/canola prices largely back to pre-War levels. This happened quicker than we expected, resulting in downgrades to our FY23 forecast.
- While these ideal FY22 conditions will see GNC produce strong cashflow, result in it having a strong core cash position and likely see further capital management, earnings now look set to decline over FY23/24/25. Hold maintained.
Another upgrade to FY22 earnings guidance
GNC now expects FY22 underlying EBITDA of A$680-730m (previously A$590- 670m), up 105-121% on FY21A (A$330.8m) and underlying NPAT of A$365-400m (previously A$310m-370m), up 162-188% on FY21A (A$139.0m).
The upgrade is 11.1% and 12.5% above the EBITDA and NPAT guidance provided in April and the mid-points (EBITDA and NPAT) are both 5.3% above consensus.
Guidance also includes a A$22.1m pre-tax loss from the revaluation of its shareholding in UMG whereas its previous guidance did not. If we exclude this loss from the upgraded EBITDA guidance, the range is A$702.1-750.1m, with the midpoint 9.3% above consensus.
Upgrade reflects additional grain and strong grain Marketing margins
The upgrade reflects a strong 4Q given increased grain has come into GNC’s system as growers have sold on-farm stocks in preparation for harvesting another bumper winter crop in FY23. We have upgraded our grain Marketing earnings.
GNC said that it is continuing to operate its ports at full capacity, exporting 7.9mt of grain YTD, despite disruptions relating to weather and COVID.
The Processing business continues to perform well, with Oilseeds benefitting from strong crush margins and high utilisation driven by strong demand for both crude and refined vegetable oils due to ongoing supply disruptions from the Black Sea.
However, with canola prices falling, these margins will likely decline in FY23.
Global grain prices are back to pre-War levels
While the outlook for FY23 is positive (big crop, high carry over grain and likely a full export program), global wheat/canola prices have fallen materially and are now below pre-War levels (inflation fears, speculative money being removed, a higher USD and Ukraine looking like it will resume exporting grain).
Australian grain prices are also now largely trading in line with global prices meaning there is no longer a spread for GNC to make material marketing profits, as occurred in FY22.
The unknown is if global grain prices appreciate again once the northern hemisphere crops are harvested and potentially come in worse than expected and/or Ukraine struggles to export its crop (won’t be an easy task).
Australian prices could also start to fall once the next harvest occurs. ABARES initial east coast 2022/23 (FY23) winter grain crop (wheat, barley, canola, chickpeas) forecast was 23.3mt, down from 28.6mt in the pcp.
However, it is 40% above an average season of about 16.6mt. ABARES will update (upgrade?) this forecast on 6 September. In preparation for the upcoming harvest, GNC has invested in additional grain storage and handling equipment to maximise its receivals capacity.
We upgrade our FY22 forecasts; but downgrade FY23/24
Given GNC’s track record of being conservative and beating expectations, we have moved our new FY22 forecast towards the higher end of the company’s new range. Our FY22 EBITDA has risen by 7.8% and NPAT is up 9.6%.
Due to the lower grain/canola prices, we have reduced our grain Marketing and Processing earnings in FY23. We have also increased depreciation expense. Our FY23 EBITDA forecast has consequently fallen by 10.5% and NPAT is 15.7% lower.
Investment view
Our SOTP ‘through-the-cycle’ valuation has fallen to (login to view). Given GNC’s earnings will likely peak in FY22, we maintain a Hold rating.
We acknowledge that GNC has benefitted from unprecedented operating conditions in FY22 which has allowed it to generate strong cashflow, resulting in capital management.
However, some of these conditions are starting to moderate. We therefore remove the price target premium we previously applied to our valuation.
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