GrainCorp: ABARES upgrades 2022/23 winter crop

Author name:: By Belinda Moore
Job title:: Senior Analyst
Date posted:: 08 September 2022, 10:00 AM
Sectors Covered:: Agriculture, Food & Beverage, Travel and Chemicals

ABARES has upgraded its 2022/23 winter crop forecast and provided its initial estimate for the summer crop. ABARES forecast implies an east coast grain crop which is below the past two years but still well above average. We note that ABARES second forecast is still usually somewhat conservative and it will likely be upgraded again if seasonal conditions remain favourable.
Given we had already assumed a full export program in FY23, the upgrades to earnings are only marginal. Instead, the additional volumes will support strong carry-over grain into FY24 and will boost Graincorp's (ASX:GNC) exports in FY24.
Although record FY22 earnings will see GNC produce strong cashflow, result in a strong core cash position and likely see further capital management, earnings now look set to decline over FY23/24/25. Hold maintained.

Event: ABARES Australian crop report – upgraded as expected

As expected, ABARES has upgraded its 2022/23 winter crop forecast from its initial estimate in June given the generally favourable seasonable conditions.

ABARES is forecasting a well above average crop (fourth largest on record), however it is below the previous two years (two largest on record).

Analysis

ABARES east coast winter grain crop (wheat, barley, canola, chickpeas) forecast has been upgraded (+8.8%) to 25.3mt (was 23.3mt). While this is down from 29.0mt in the pcp, it is 52% above an average season of about 16.7mt. This was larger than our forecast of 23.3mt.

Ongoing wet conditions in large parts of southern QLD and northern and central NSW prevented many growers from sowing or re-attempting to sow a late winter crop.

ABARES initial summer sorghum crop forecast of 2.6mt is down 4% on last year’s crop, but is the fourth highest on record and was also ahead of our previous forecast of 2.0mt. ABARES said that this estimate is supported by the moisture in the group, rainfall outlook and the significant areas of land left fallow during winter.

Forecast changes and outlook commentary

We note that ABARES second forecast for the season is usually still somewhat conservative as there is a long way to go until harvest in Nov/Dec. For example, last year, ABARES second forecast for the east coast winter crop was 26.5mt and it came in at 30.4mt.

We will not know the exact size of the winter crop until it is harvested and will continue to monitor its outlook as the season progresses. There is already some concern that rainfall will delay harvest and may impact the quality of the crop (removes protein levels) and thus the returns to farmers.

Our FY22 forecast remains unchanged and is at the upper end of GNC’s guidance for underlying EBITDA of A$680-730m and NPAT of A$365-400m. GNC will report this result on 16 November.

In FY23, as long as seasonal conditions remain favourable (BOM’s 3-month rainfall outlook says they likely will), GNC will benefit from an above-average crop and high carry-in grain of ~6.1mt. We now assume FY23 grain receivals of 13.2mt vs 11.6mt previously. However, given we had already assumed a full export program for FY23 of 10mt, the upgrades to our FY23 EBITDA and NPAT forecasts are only minor.

We also now assume more normalised marketing earnings reflecting Australian grain prices largely trading in line with global prices meaning there is no longer a spread for GNC to make material marketing profits (as occurred in FY22).

However, there is upside risk to our forecasts if global grain prices appreciate again once the northern hemisphere crops are harvested and potentially come in worse than expected and/or Ukraine struggles to export its crop (won’t be an easy task).

Australian prices could also start to fall once the next big harvest occurs given export capacity constraints.

The additional volumes from ABARES update will support strong carry-over grain into FY24 (MorgansF is now 3.5mt vs 1.9mt previously). The above average carryover grain will again boost GNC’s exports in FY24 (high margin work). This has seen us upgrade our FY24 EBITDA forecast by 14.8% and NPAT by 29.2%.

Investment view

Our SOTP ‘through-the-cycle’ valuation has risen to (login to view). Based on more normalised earnings (FY25), GNC is trading on a PE of 21.9x and EV/EBITDA multiple of 9.9x. We maintain a Hold rating.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.