GrainCorp: The perfect storm

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

08 February 2022, 9:00 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• GrainCorp (ASX:GNC) has provided FY22 earnings guidance which was materially higher than consensus estimates reflecting another bumper crop, above average carry-over grain and strong global demand for Australian grain and oilseeds. While GNC’s execution has been impressive, FY22 essentially reflects near perfect trading conditions across both grain Marketing and Processing.
• Two bumper crops in a row will likely see FY23 start with record carry-in grain. Favourable weather and prices should see a big plant in FY23 however we note there is a long way until harvest. We don’t expect the record margins being achieved across Marketing and Processing to be maintained in FY23.
• After strong share price appreciation and given FY22 reflects ideal operating conditions which are unlikely to be repeated, we move to a Hold rating with a new price target of (login to view).

FY22 earnings guidance is materially ahead of expectations

GNC expects FY22 underlying EBITDA of A$480-540m, up 45-63% on the pcp (A$330.8m) and underlying NPAT of A$235-280m, up 69-101% on the pcp (A$139.0m). At the mid-point, guidance was 37.5% and 55.5% above consensus estimates.

Guidance includes the maximum payment under the crop production contract (A$70m + A$6m fee).

FY22 trading conditions are as good as it gets

GNC’s extremely strong FY22 guidance reflects a combination of another bumper crop, well above average carry-in grain of 4.3mt, outstanding supply chain execution, continued delivery of operating initiatives and high global demand for Australian grain and oilseeds.

GNC expects FY22 grain receivals of 16-17mt (vs 16.5mt in FY21A) and exports of 8.5-9.5mt (vs 7.9mt in FY21).

YTD GNC has received 13.7mt of grain from the winter crop which is now largely complete. GNC still has an above average summer sorghum crop to come. YTD grain exports are 3.0mt.

Given our forecasts were largely in line with these metrics, the material earnings beat reflects record Marketing and Processing earnings. The Marketing business has benefited from high volumes and a favourable spread between the AU basis (at ten-year lows) and global wheat prices (at historically high levels), resulting in record Marketing margins.

Processing has also continued to perform well, benefitting from strong crush margins (larger canola crop and high vegetable oil prices) and high utilisation.

Outlook is positive for FY23 but unlikely to repeat FY22 earnings

Another bumper crop in FY22 will provide a positive tailwind in FY23 from materially higher carry-over grain (we forecast 6.1mt vs. 4.3mt in the pcp).

Also, with good subsoil moisture across the east coast, above average rainfall forecast over coming months and attractive grain prices, the outlook for the planting of the next winter crop (FY23 earnings) is looking positive, albeit it is only early days (planted April – June).

We also note that seasonal conditions are forecast to normalise in coming months with the BOM expecting the major climate drivers to decline and has said that La Nina has now peaked.

In FY23, we forecast margins across Marketing and Processing to decline. According to Rabobank, as the northern hemisphere ramps up its grain production, both global grain prices and the demand for Australian grain will ease. As global freight prices fall, this will also affect the competitiveness of Australian grain in Asia.

We upgrade our forecasts

Reflecting GNC’s guidance and the expectation that high carry-over grain will assist future earnings, we have upgraded our FY22/23/24 EBITDA forecasts by 33.3%/15.8%/3.9%. Given GNC’s operating and financial leverage, the upgrades at the NPAT level are more material.

As we saw in FY21, given record high earnings in FY22 and minimal core debt (excludes commodity inventory), we would not be surprised if there was further capital management initiatives in FY22.

Investment view

Our SOTP valuation has risen to (login to view). After strong share price appreciation and given GNC’s earnings will peak in FY22, we downgrade to a Hold rating. The risk to our view is if the ideal operating conditions continue and GNC remains in an earnings upgrade cycle.

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