About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 06 June 2014, 8:45 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
GrainCorp (GNC) is investing A$200m over the next three years to enhance the efficiency of its network. The capital will be spent on upgrading the rail capability at the company's primary sites (cA$170m) and building three new sites (cA$30m).
GNC will also rationalise its uneconomic sites to reduce its cost base and allow it to become more competitive in an increasingly competitive market place. The full benefits of its investment will require further investment by the government (cA$50m).
EPS neutral (in a normal year)
GNC expects Project Regeneration to be EPS neutral in a 'normal season'. On the back of the cost savings from rationalising the network, our EBITDA forecasts have increased.
However, our NPAT forecasts remain unchanged as there will be higher depreciation, and net interest from funding Project Regeneration. While the spend on Project Regeneration and the A$335m spend on the Gamechangers and Asset Optimisation program will see GNC's gearing increase over the coming years, core gearing will remain comfortably within GNC's policy of being under 25% and the dividend policy will remain unchanged.
What we think
While the announcement of Project Regeneration wasn't unexpected, the quantum of capex spend certainly was. We applaud management's proactive stance in addressing the increasing competition. However, given the increased competition, GNC has to essentially spend A$200m to maintain its 'normalised earnings' in an average season in the future.
In our view, by making these changes to the network, GNC may potentially make it politically easier for ADM to take over the business at some point in the future. We believe that ADM would have implemented a number of these changes had it been successful with its takeover offer.
We remain concerned about the potential earnings hit to FY15 if El Nino arrives later in the season. Based on current fundamentals, we retain our Hold recommendation and share price target of A$8.58.
Morgans clients can access our detailed research on GrainCorp (GNC). If you are interested in finding out more, please contact your nearest Morgans office.
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