Company Reports

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. But we don't believe the firm has carved an economic moat, and forecast returns on invested capital to trail the firm's cost of capital over the long term.

At current prices, no-moat GrainCorp looks overvalued. GrainCorp’s underlying EBITDA of AUD 164 million for the first half of fiscal 2024 was no surprise, given it was practically reported last week. This was less than half the previous corresponding period, which enjoyed a bumper crop and exceptional supply chain margins. We continue to expect a more challenging second half and make no changes to our forecasts. In our view, this is a more normalized year for GrainCorp. We maintain our AUD 7.40 per share fair value estimate with long-term forecasts based on normalized crop production and conditions.

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, we don't believe the firm has carved an economic moat, and forecast returns on invested capital to trail the firm's cost of capital over the long term.

Grain production volumes continue to revert toward a normalized year. The Australian Department of Agriculture, Fisheries and Forestry estimates 2024 east coast winter grain production of about 23 million metric tons, a 22% decline from 2023. While this is only slightly ahead of the 10-year average, we expect production to fall further. Our estimate of normalized production remains about 18 million metric tons, based on a reversion to longer-term historical averages.

After enjoying historically high supply chain margins on the back of three consecutive bumper crops and strong demand for Australian grain, profitability at GrainCorp is finally normalizing as we expected. While annual grain volumes fluctuate, no-moat GrainCorp's value hinges on a normalized crop-growing year—particularly given its volume-based insurance contract. The Australian Department of Agriculture, Fisheries, and Forestry forecasts 2024 east coast winter grain production of about 22 million metric tons, a 27% decline from 2023. This is broadly in line with the 10-year average but still above our normalized estimate of about 18 million metric tons, based on a reversion to longer-term historical averages.

No-moat GrainCorp's fiscal 2023 result was broadly in line with our forecast, with net profit after tax of AUD 250 million close to our prior forecast. We lift our fair value estimate by 3% to AUD 7.40 per share, principally due to the time value of money.

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, we don't believe the firm has carved an economic moat, and forecast returns on invested capital to trail the firm's cost of capital over the long term.

Three consecutive bumper crops and strong demand for Australian grain have allowed no-moat GrainCorp to command historically high supply chain margins in recent years. Global supply shortages amid a poor Northern Hemisphere harvest and disruption to production and trade from the Ukraine/Russia conflict have lifted global pricing, encouraging exports and allowing GrainCorp to maximize capacity in its processing infrastructure. We forecast fiscal 2023 EBITDA of AUD 525 million, based on an above-average east coast winter crop of about 31 million metric tons. But back-to-back-to-back bumper harvests aren't typical, particularly in combination with globally high grain prices. We expect GrainCorp's profitability to normalize over the coming years as cropping normalizes and we maintain our AUD 7.20 per share fair value estimate.

Shares in no-moat GrainCorp remain expensive compared with our unchanged AUD 6.50 fair value estimate following the release of interim fiscal 2022 earnings. While GrainCorp continues to bask in exceptional conditions, we expect longer-term cropping to be less profitable. Underlying EBITDA of AUD 427 million was a threefold increase on the prior corresponding period, or pcp, tracking our unchanged fiscal 2022 forecast of AUD 659 million--toward the top of AUD 590 million to AUD 670 million guidance. GrainCorp declared fully franked interim and special dividends totalling AUD 24 cents per share. We continue to forecast total fully franked dividends of AUD 45 cents per share in fiscal 2022.

The stars have aligned for GrainCorp. Back-to-back bumper crops in Australia allow GrainCorp to maximise capacity in its processing infrastructure, and supply shortages in the Northern Hemisphere are leading to high grain prices, allowing GrainCorp to command historically high supply chain margins. We raise our fair value estimate for shares in GrainCorp to AUD 6.50, from AUD 6.00 previously. We increase our fiscal 2022 EBITDA forecast by 30% to AUD 659 million on the back of higher grain volumes and strong export demand. We also expect elevated production levels to benefit fiscal 2023 carry-in volume, and we raise our fiscal 2023 EBITDA forecast by 7% to AUD 291 million. But we do not expect such favourable conditions to persist and our longer-term forecasts remain intact. Shares in no-moat GrainCorp screen as expensive.

We raise our fair value estimate for shares in no-moat GrainCorp by 11% to AUD 6.00 following a significant increase to our near-term earnings forecasts. We increase our fiscal 2022 EBITDA forecast by 72% to AUD 506 million on the back of higher grain volumes and strong export demand leading to higher-than-anticipated supply chain margins. We also expect the elevated production levels to benefit fiscal 2023 carry-in volume, and raise our fiscal 2023 EBITDA forecast by 7% to AUD 273 million. Our longer-term forecasts remain broadly intact.

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, we don't believe the firm has carved an economic moat, and forecast returns on invested capital to trail the firm's cost of capital over the long run.

Crop growing conditions across east-coast Australia are shaping up to be the best in several years, which should benefit no-moat GrainCorp. The Australian Bureau of Agricultural and Resource Economics, or ABARES, reiterated its growth projections for the 2019-20 growing season in its June update, and offered optimism for even stronger growth in 2020-21. While the weather will ultimately determine the accuracy of these forecasts, we’ve slightly increased our revenue and earnings forecasts for GrainCorp’s fiscal 2021. However, we maintain our AUD 4.30 per share fair value estimate, which is primarily based on our unchanged midcycle assumptions.

Our updated fair value estimate for no-moat GrainCorp on a standalone basis is AUD 4.30 per share. This is slightly higher than the valuation implied by our prior AUD 9.00 per share GrainCorp fair value estimate and our AUD 5.00 per share United Malt Group valuation, owing to the time value of money since our last update. We make no material changes to our long-term assumptions.

The upcoming demerger of United Malt Group from GrainCorp allows shareholders to invest directly in the former parent's crown jewel. We expect United Malt will enjoy a stable earnings stream, solid profitability, and organic growth opportunities. The company is the fourth largest global malt processor and works with some of the world's largest breweries and distillers as well as fast growing craft producers. The demerger will enable shareholders to own this asset while having the option as to whether to own the remaining GrainCorp portfolio. Although management expects United Malt to face higher near-term costs related to public listing, we think this will be offset by longer-term savings.

We recommend that GrainCorp shareholders vote for the proposed resolution at the scheme meeting on March 16, 2020, to separate the company’s malt segment--to be renamed United Malt--from the group.

No-moat GrainCorp’s fiscal 2019 results reflected an abnormally challenging period, with one of the worst years on record for east-coast Australian grain production severely damaging the company’s short-term profitability. Full-year consolidated EBITDA of AUD 69 million and underlying net loss after tax of AUD 82 million were both slightly worse than our AUD 82 million estimated EBITDA and AUD 74 million forecast net loss, owing to ongoing drought and trade disruptions that led to higher costs and trade disruptions in Australian grains and oils alongside timing issues which dented profitability in GrainCorp’s malt segment. Nonetheless, we expect some relief in fiscal 2020 given improved production, cost savings, and the benefit of a new grain derivative contract, and continue to forecast substantial improvement over the long run during more-normalised growing years. We maintain our AUD 9.00 per share fair value estimate, suggesting the name is undervalued for those willing to look past the current environment.

Ongoing east-coast Australian drought and crop-marketing challenges has led no-moat GrainCorp to lower its fiscal 2019 earnings outlook, trailing our near-term projection. Although the long-term is more impactful for valuation than recent weather-hampered years, this greater earnings loss slightly reduces our fair value estimate to AUD 9.00 from AUD 9.20. Shares screen as undervalued, with the market likely focused on these challenges, though we also caution that risk on planned divestitures and potential pressure from lenders remains.

The Australian Competition and Consumer Commission’s, or ACCC's, push-back against no-moat GrainCorp’s planned sale of its bulk liquid storage business to ANZ Terminals would reduce our AUD 9.20 fair value estimate by about 6.5%, or AUD 0.60 per share, if the deal ends up not taking place. We noted after the original announcement in March that the divestiture’s price was a good deal for GrainCorp shareholders. The AUD 350 million offer implies a 13 times multiple to the segment’s expected 2019 EBITDA of AUD 27 million, higher than the approximately 7 times enterprise value/EBITDA implied by our GrainCorp valuation in a more normalised long-run earnings environment, reflecting the terminals’ steadier earnings power, solid profitability, and good growth prospects. We maintain our fair value estimate in anticipation of the ACCC’s financial decision, scheduled for Oct. 17, 2019.

No-moat GrainCorp’s 10-year derivative contract to smooth earnings through the volatile east-coast Australian crop-growing cycle tightens its valuation range, but is a net negative for shareholders under our base-case scenario. The contract should help management plan for long-term capital allocation and asset utilisation rather than struggle with annual volatility, and we’ve reduced our uncertainty rating to medium from high. But we assume the company and its counterparty will see payments net out over the length of the contract. As a result, we reduce our fair value estimate to AUD 9.20 from AUD 9.30 to account for the present value of the AUD 10 million yearly fee GrainCorp pays under the agreement.