Company Overview: GrainCorp Limited (ASX: GNC) is a global agri-business 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 Limited 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
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Decent Increase in Revenue and Stable Balance Sheet: GrainCorp Limited (ASX: GNC) is a global agri-business company that provides a diverse range of products and services across the food and beverage supply chain to customers and is engaged in the elevation and storage of grains, transportation of liquid oil, etc. As on 3 November 2020, the market capitalization of the company stood at ~$805.57 million. The company is focusing on growth markets and is also focused on improving its ROCE by strengthening its core businesses. It is also maintaining a disciplined approach to capital management.
During 1H20, the company delivered an improved financial performance with a decent rise in revenue to $1,959 million, up from $1,895 million in 1H19. In the same time span, it reported a rise of $27 million in underlying EBITDA to $183 million, and a higher underlying NPAT of $55 million, reflecting an increase from a loss of $48 million in the pcp. This was mainly due to repositioning of the company’s portfolio, the sale of the Australian Bulk Liquid Terminals business and the successful demerger from United Malt.
1H20 Financial Highlights (Source: Company Reports)
During 1H20, the company reported an improvement in key safety metrics with a rise in number of Safety Health and Environment (SHE) engagements and undertook various Critical Risk Reviews. During 1H20, the company reported a decent balance sheet with zero core debt and seems well-funded with a strong position post the Demerger of United Malt. The company retains a core debt gearing of 0% and net debt gearing of 44%. The company retains a stake of 10% in United Malt, providing an additional resources and financial flexibility to its balance sheet.
Debt and Liquidity Profile (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: From the balance sheet standpoint, assets/equity ratio of the company was 2.56x, as compared to the industry median of 4.35x and debt/equity ratio of the company stood at 1.18x, lower than the industry median of 1.31x. In the same time span, current ratio of the company stood at 1.22x, higher than the industry median of 0.81x. This indicates that the company retains a decent liquidity position to pay off its current liabilities using its current assets.
During 1H20, gross margin of the company stood at 10.2%, lower than the industry median of 27.4%. 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 stood at 4%, relative to the industry median of 2.1%. This indicates that the company is well managing its costs and can convert 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%. The company also reported cash cycle of 107.1 days during 1H20, higher than the industry median of negative 13.9 days.
Key Margins (Source: Refinitiv, Thomson Reuters)
Crop Production Contract and New Rail Contracts: During 1H20, the company reported decent results from Feeds, Fats & Oils with total grain sales of 4.6 (mmt)2 with continued demand for liquid feeds, tallow and used cooking oil. The company continued its international growth strategy and exported 0.6 (mmt)2 of grains, reflecting an increase from 0.2 (mmt)2 in 1H19. The company is focusing on cost reduction, customer engagement, and asset utilization and also benefited from more flexible rail contracts which started in FY20. GNC has entered a 10-year Crop Production Contract with White Rock Insurance Ltd, wherein production payments depend on annual ECA winter crop production, as estimated by ABARES.
Agribusiness Operational Highlights (Source: Company Reports)
Key Risks: The company is exposed 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 may also face the risks of climate variability and weather conditions, transportation and logistics supply chain risk, market demand risk, industry cyclicality, and commodity price risk, etc.
Outlook: The company is creating a platform for growth and is maximizing its assets by improving crush margins and optimizing its ECA networks. It is effectively managing crop variability and has shown resilience through COVID-19 pandemic. The company is also expanding its origination network and has progressed on its supply chain infrastructure in Western Canada. The company is likely to see a benefit of $10-15 million from lower fixed rail costs, rates and more flexibility for rail providers and operations in FY20. Notwithstanding the lower exportable surplus in ECA in HY20, GNC has continued to drive volumes through its supply chains and adapt the network to handle imported grain from inter-state. The company is expecting higher grain crops in the second half and is likely to witness widespread planting for FY21 due to recent rainfall in ECA and favorable weather outlook.
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 has reported decent results from each of its segments, reflecting its new operating model and essential nature of the business. Despite the COVID-19 pandemic, the company has shown resilience with continued delivery to its customers. As per ASX, the stock of GNC is trading close to its 52-weeks’ low levels of $2.81, proffering a decent opportunity for accumulation. The stock of GNC gave a negative return of 5.63% in the past three months and a negative return of 5.38% in the last one month. On a technical front, the stock of GNC has a support level of ~$3.359 and a resistance level of ~$4.224. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target price of lower double-digit upside (in % terms). Considering the current trading levels, disciplined approach to capital management, decent results from each of its segments, and essential nature of the business in the COVID-19 pandemic, the stock of GNC is likely to retain a decent growth potential. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $3.520 as on 03 November 2020.
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GNC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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