GrainCorp: It doesn’t get any better than this

Author name:: By Belinda Moore
Job title:: Senior Analyst
Date posted:: 17 November 2022, 7:30 AM
Sectors Covered:: Agriculture, Food & Beverage, Travel and Chemicals

GrainCorp's (ASX:GNC) FY22 result was a record, although it was slightly weaker than expected and at the bottom end of its guidance range given a number of one-off items.
The outlook for the current winter crop (FY23 earnings) remains positive, albeit the wet weather creates some uncertainty. It is unlikely GNC will be able to beat FY22 earnings given a smaller crop, lower marketing margins and lower crush margins.
With earnings now set to decline over FY23/24/25, we maintain a Hold with a new price target of (login to view). GNC looks expensive based on its ‘through the cycle’ earnings guidance, trading on an FY25F PE of 22.0x and EV/EBITDA of 9.3x.

FY22 result was a record but missed consensus

EBITDA was A$703.4m, up 112.6% on the pcp and NPAT was A$380.4m, up 173.1%. The Board declared a final dividend of 30cps fully franked.

Beneficiary of a big crop and high prices = huge margin expansion

The record result was underpinned by the second largest east coast grain crop on record, above average carry over grain, record high grain marketing earnings and a contribution from its strategic initiatives.

Given the bumper crop, the crop production contract reduced earnings by a net A$93m (A$76m payment and A$17m fair value movement).

Processing earnings were also historically high given the materially larger canola crop (resulting in increased canola seed supply) and high oil prices supported strong crush margins. The result also included a A$23.4m negative impact from the revaluation of GNC’s shareholding in UMG.

Pleasingly, operating cashflow was stronger than expected (+152.8% on pcp). Net debt fell to A$540.1m, below last year of A$599.2m. Pleasingly, GNC had a strong core cash position (excluding commodity inventory) of A$177.0m.

FY23 earnings set to fall, albeit they will still be historically high

GNC will provide FY23 earnings guidance at its AGM on 16 February when there is more certainty post-harvest. GNC did say it is expecting the 2022/23 crop (FY23 earnings) to be well above average. It will also benefit from above average carry over grain of ~4.9mt from FY22, but this was less than MorgansF of 6.1mt.

Harvesting of the 2022/23 grain crop is underway in QLD but has been delayed by several weeks due to wet weather in parts of NSW and Victoria. GNC said this will impact both yield and quality and expects a higher level of feed-grain receivals.

Harvest will continue until the end of January. YTD 1.1mt (was ~2.3mt in the pcp) of grain has come into GNC's system and it has exported 0.6mt (was 0.9mt in the pcp). ABARES last (September) East Coast winter grain production forecast was 25.3mt (down 12.6% on the pcp of 29.0mt). If achieved, this is ~52% above an average season and is the fourth largest on record.

Strong grain marketing margins moderated in the 2H22 as supply from the Northern Hemisphere improved. With Australian grain prices now largely trading in line with global prices, there is no longer a spread for GNC to make material marketing profits, as occurred in FY22.

Nonetheless, GNC said domestic and global demand for feed and milling grade grain remains strong. Oilseed crush margins are expected to remain favourable, and GNC is well positioned to continue operating its crushing facilities at a high utilisation.

Forecast changes

We make slight revisions to our grain throughput assumptions reflecting lower than expected carry out grain from FY22 and more conservative export assumptions given wet weather and logistics issues may slow the export program.

This has seen our FY23/24/25 EBITDA forecasts fall by 3.6%/7.4%/0.0%. The downgrades to NPAT are more material at 7.2%/16.3%/6.4% due to higher net interest expense.

Investment view

Our SOTP ‘through-the-cycle’ valuation has fallen to (login to view). With earnings looking set to decline over FY23/24/25, we maintain a Hold rating. The stock is expensive based on the company’s through the cycle earnings guidance or an FY25 PE of 22.0x and EV/EBITDA of 9.3x.

Despite this, in the near term, GNC’s share price will likely trade in line with the wheat price, as well as headlines associated with the Russia-Ukraine war escalating, flooding affecting the winter crop, rain at harvest and/or farmers being unable to plant summer crops given it is too wet.

The next catalyst for the stock is ABARES Crop report on 6 December.

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