GrainCorp: Unprecedented times
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 13 April 2022, 8:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Two months after issuing its FY22 guidance in early February, GrainCorp (ASX:GNC) has upgraded guidance which was again materially ahead of consensus expectations. Given GNC has not changed its FY22 grain receivals or grain export guidance, the upgrade appears to largely come from Grain Marketing and Processing.
- GNC is currently benefiting from near perfect conditions – a big east coast grain crop and high grain/oil prices. We have upgraded our forecasts to reflect this. While the upgrade cycle is firmly intact, eventually these conditions will revert and GNC will be unlikely to cycle these record high earnings again.
- These ideal conditions will see GNC produce strong cashflow and will result in it having a strong core cash position. Further capital management is also likely. The next update will be GNC’s 1H22 result on 11 May. We maintain a Hold rating.
Another material upgrade to FY22 earnings guidance
GNC now expects FY22 underlying EBITDA of A$590-670m (previously A$480- 540m), up 78-103% on the pcp (A$330.8m) and underlying NPAT of A$310-370m (previously A$235-280m), up 123-166% on the pcp (A$139.0m).
The upgrade is 23.5% and 32.0% above the EBITDA and NPAT guidance provided in February. The mid-point (EBITDA and NPAT) is 26.5% and 34.0% above consensus.
Guidance compares to GNC’s ‘through-the-cycle’ or ‘average season’ FY24 EBITDA target of A$240m. We think there is upside to this target.
Massive margins for Grain Marketing and Processing
With GNC’s grain receivals and grain export guidance remaining unchanged, the material upgrade essentially reflects extraordinary trading conditions across both its Grain Marketing and Processing divisions.
Due to the war and uncertainty over both Ukraine and Russia’s ability to grow and export wheat (~29% of global wheat exports), the wheat price has rallied over 30% since GNC last gave guidance.
This uncertainty comes at a time when global wheat stocks are already at historically low levels given drought conditions in North and South America. Meanwhile, Australian grain continues to trade at a discount to global prices given our large local crop, export constraints and positive signs for the upcoming 2022/23 winter crop.
Grain Marketing is making record margins on buying low-priced Australian crop and selling it at higher international prices.
The Processing business has also continued to perform extremely well, benefitting from strong crush margins (larger canola crop and rising vegetable oil prices) and high utilisation driven by strong demand for both crude and refined vegetable oils due to supply disruptions from the Black Sea.
Conditions will eventually revert - another big winter crop plant in FY23
With good subsoil moisture across the east coast, above average rainfall forecast over coming months and attractive grain prices, another big plant is expected for the 2022/23 winter crop. However, as always, there is a long way to go until harvest in November 2022 – January 2023.
At least in the short term, the spread between Australian and international wheat prices and oilseed crush margins will remain favourable for GNC. In FY23, we forecast margins across Marketing and Processing to decline, but remain at elevated levels given it will take time for global grain stocks to replenish.
We upgrade our forecasts
Reflecting GNC’s guidance and the positive outlook for the 2022/23 winter crop plant and expectations that grain prices will remain at historically high levels, we have upgraded our FY22 and FY23 EBITDA forecasts by 29.4% and 19.8%.
Given GNC’s operating and financial leverage, the upgrades at the NPAT level are more material. We expect there will be further capital management initiatives in FY22
Our SOTP ‘through-the-cycle’ valuation has risen to (login to view). Given strong share price appreciation and GNC’s earnings will likely peak in FY22, we maintain a Hold rating.
However, we acknowledge that the operating conditions GNC is benefitting from are unprecedented and there is potentially further upside to FY22 guidance and our FY23 forecasts. To reflect this, in setting our new price target of (login to view), we have applied a 15% premium to our valuation.
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