GrainCorp Limited

Company Overview: GrainCorp Limited (ASX: GNC) is a global agribusiness company that provides a diverse range of products and services across the food and beverage supply chain to customers in over 30 countries. The company is engaged in the elevation and storage of grains, transportation of liquid oil, etc. It has operations in Australia, New Zealand, Asia, North America, Europe, and the United Kingdom. These markets collectively represent over 50% of the international export trade in wheat, barley, and canola. GrainCorp had three operating segments: Grains, Malt and Oils. However, it announced that the Grains and Oils businesses would be combined into an integrated grains and edible oils business.

GNC Details

Increased Shareholders Value and Expanded Origination Network: GrainCorp Limited (ASX: GNC) is a global agribusiness company that provides a diverse range of products and services across the food and beverage supply chain to customers in over 30 countries. The company is engaged in the elevation and storage of grains, transportation of liquid oil, etc. As on 1 September 2020, the market capitalization of the company stood at ~$984.08 million. During FY19, GNC’s portfolio of businesses and an assessment of a range of strategies created value for shareholders. For the year to 30 September 2019, GrainCorp Limited reported underlying earnings before interest, tax, depreciation, and amortization of $69 million and an underlying net loss after tax of $82 million. These results were affected by costs associated with the proposal from Long-Term Asset Partners Pty Ltd and by restructuring costs arising from operational streamlining.

The company is working on improving its ability to manage year-by-year grain production volatility, which requires to continually adapt its operations to serve grower customers profitably. During FY19, the company improved the efficiency of its network of storage sites across the eastern grain belt of Australia by targeting investment and improved supply chain processes and expanded the origination network internationally by opening a trading office in India to manage the importation of Australian pulses. The company is likely to benefit from the considerable growth prospects driven by large increases in both global grain demand and global grain trade.

The company is also focused on high value growth markets, driven by demand for premium beer, craft beer and scotch whisky. The planned expansion of its malting capacity in Scotland is expected to complete in 2021. It is also focused on improving its return on capital employed by strengthening its core businesses and maintaining a disciplined approach to capital management.

During 1H20, the company reported improved results from continuing operations and reported a decent balance sheet with zero core debt. Each of its business segments was up substantially on the pcp, reflecting the new operating model of the company and the steps taken to manage crop variability and maximize assets.

Financial Highlights (Source: Company Reports)

Strong First Half Result in Period of Significant Change: During 1H20, the company delivered on its operational initiatives to strengthen its core platform and drive greater value creation. During the half year, GNC delivered an improved financial performance with a large increase in earnings, notwithstanding the third consecutive year of drought. The company reported an underlying EBITDA of $183 million, reflecting an increase of $27 million on the pcp and an increased underlying NPAT to $55 million, up from a loss of $48 million in the pcp. This reflects a significant repositioning of the Group’s portfolio, including the sale of the Australian Bulk Liquid Terminals business and the successful demerger of United Malt. The company also reported a decent balance sheet with zero core debt. The 10% minority interest of the company in United Malt was valued at $112 million, providing additional balance sheet resources and financial flexibility.

1H20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of GrainCorp Limited. Perpetual Investment Management Limited is the largest shareholder in the company, with a percentage holding of 13.10%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During 1H20, gross margin of the company stood at 10.2% as compared to the industry median of 41.5%. In the same time span, EBITDA margin of the company witnessed a slight improvement over the past year and stood at 1.1%, up from 1.0% in 1H19. During the half-year, net margin of the company went up to 4% from a negative margin in the previous half. This indicates that the company is well managing its costs and is capable of converting its revenue into profits. In the same time span, Return on Equity of the company witnessed an increase over the previous half and stood at 5.2%. This shows that the company is well managing the capital of its shareholders and is capable of generating profits internally. In the same time span, assets/equity ratio of the company was 2.56x, and debt/equity ratio of the company stood at 1.18x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The performance of the company is susceptible to a variety of risks including the risks related to the volatility of eastern Australian winter grain production, operation around grain bunkers, working in confined spaces, electrical safety, fire and explosion, and rail safety. The company is also exposed to climate variability and weather conditions, transportation and logistics supply chain risks, market demand risk, industry cyclicality and commodity price risk, etc.

Future Expectations and Outlook: The market conditions have witnessed a significant improvement with widespread rainfall across eastern Australia, providing optimism for a much larger crop. The company is well-progressing with harvest readiness, including a large recruitment and training program for seasonal workers. Despite the outbreak of COVID-19, the company has shown resilience and played a critical role in supporting the food and grain supply chain.

The company is expecting capital expenditure for FY20 to be in the range of $35 million to 45 million. It is also planning for higher grain exports in 2H20, and lower grain trans-shipments to ECA ports as domestic demand is likely to taper, with expectations of a stronger crop in FY21. GNC is expecting favorable oilseed crush margins due to prevailing canola oil and meal values. The company has an ongoing harvest readiness, including site preparation, a focused maintenance program, equipment relocation between sites, large-scale procurement of tarpaulins and extensive recruitment and training. The company will release its FY20 results on 8 November 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is creating a platform for growth and is maximizing its assets by improving crush margins and optimizing its ECA networks. The company is effectively managing crop variability and has shown resilience through COVID-19. The company is expanding its origination network and has progressed its supply chain infrastructure in western Canada. As per ASX, the stock of GNC is currently trading below the average of its 52-week trading range of $2.810 - $6.470, proffering a decent opportunity for accumulation. The stock of GNC gave a return of 25.1% in the past six months and a return of 15.28% in the past one month. We have valued the stock using the price to cash flow multiple based illustrative relative valuation approach and arrived at a target price of low double-digit upside (in percentage terms). Considering the current trading levels, decent returns in the past six months, resilience in the period of uncertainty and decent long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $4.230, down by 1.628% on 1^st September 2020.

GNC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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