GrainCorp: Another earnings upgrade but more are likely

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
13 August 2021, 9:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • We have materially upgraded our forecasts following GrainCorp's (ASX:GNC) second FY21 profit upgrade.
  • FY22 outlook commentary was upbeat given the planted area and favourable outlook for the 2021/22 winter crop. GNC will also benefit from upgraded carryover grain. Consequently, we have moved ahead of ABARES next Crop Report on 14 September and have materially upgraded both our crop and earnings forecasts.
  • We maintain an Add rating with a new price target of (login to view).

Event: Upgrade to FY21 earnings guidance

FY21 guidance is now for underlying EBITDA of A$310-330m (was A$255-285m) and underlying NPAT of A$125-140m (was A$80-105m). Remember guidance includes the A$70m payment under the crop production contract plus the A$6m cost of the instrument.

Note that guidance excludes any impact from the revaluation of its UMG shareholding (YTD gain is ~A$13m).

Analysis

At the mid-point, guidance is 18.5% higher at the EBITDA level and 43.2% higher at the NPAT level than GNC’s previous guidance.

In FY21, GNC has benefited from a record east coast grain crop. Management noted that the upgraded guidance reflects additional grain volumes, the benefit of strong global demand for Australian grain and vegetable oils (especially given crop production challenges in the northern hemisphere) and the delivery of key operating initiatives. The Processing business has benefited from high utilisation of its oilseed crush facilities and strong crush margins.

GNC has also upgraded its FY21 export volumes to ~8.0mt from 7.0-8.0mt previously. We think its previous grain receivals guidance of 15.5-16.5mt is conservative given GNC has received solid volumes post-harvest and the summer crop has been higher than expected. Our new receivals forecast is 16.8mt.

FY22 outlook commentary is also upbeat

2021/22 crop (FY22 earnings) outlook is also positive. Additionally, grain carryover from the FY21 crop into FY22 has been upgraded to ~4.5mt from 3.5-4.5mt previously and is well above an average year of ~2.5mt. This grain will underpin a strong start to FY22. It is also high margin work.

GNC is currently preparing for what is expected to be another large grain harvest with a strong maintenance and capital investment program. The company is building 1mt of new storage capacity in time for harvest and re-opening ‘flex’ sites to accommodate the anticipated demand. GNC is also looking to recruit over 3,000 harvest casuals, similar to last year.

Management highlighted the strong potential in the upcoming crop, based on factors including area planted, sub-soil moisture levels, season-to-date rainfall and longer-term weather forecasts.

We make material upgrades to our forecasts

Our new FY21 EBITDA and NPAT forecasts have been upgraded by 20.5% and 39.7% respectively.

Our industry feedback suggests that the 2021/22 winter grain crop (wheat, barley, canola and chickpeas) could come close to being as large as last year’s record crop. We have consequently upgraded our FY22 winter crop forecast to 24.0mt compared to 20.5mt previously (FY21 was 28.0mt). Given this crop will be harvest from late October until the end of December, the usual agri risks remain including rain at harvest.

Another bumper crop and 4.5mt of carryover grain means that FY22 earnings should be above FY21. Our new FY22 EBITDA and NPAT forecasts have been upgraded by 23.9% and 46.1% respectively. Our new FY22 forecast assumes that GNC incurs another A$70m for the crop production contract.

Investment view

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

With bumper crops in FY21 and FY22, carry-over benefits and clear strategic initiatives in place to improve its ‘through-the-cycle’ earnings and ROIC, GNC remains well placed. We maintain an Add rating.

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