GrainCorp Limited

Ten-Year Contract: GrainCorp Limited (ASX: GNC) is engaged into global agribusiness. The market capitalisation of GNC stood at ~A$1.76Bn. In an announcement made on Friday 7^th June 2019, the company mentioned that it had entered into a 10-year agreement in order to manage the risk which is associated with the volatility of eastern Australian winter grain production. In accordance with the previous announcement dated 4^th April 2019, the objective behind the contract is to smooth the company’s cashflow and earnings throughout the volatile east coast Australia grain harvests.

The contract would have several benefits for GNC as well as for the shareholders, which include a reduction in cash flow volatility, primarily in the time of severe drought.The contract will come in effect from FY 2019-20. During the term, a fixed payment of AUD$15 per tonne would be made for each tonne of the actual east coast of Australia winter crop production. The company is expecting the total pre-tax annual cost of the Contract to be less than AUD$10 Mn (including associated financing costs) after excluding production payments. 

Quick Look at Half Yearly Results: The revenue of the company stood at A$2.493 Bn in 1HFY19 in comparison to A$1.987 Bn in 1HFY18. When it comes to the balance sheet and capex position, the core debt and net debt of the company stood at $880Mn and $1,744Mn, respectively. The core debt gearing was around 32% while the net debt gearing stood at approximately 42%. The net debt gearing was higher because of higher inventory levels and timing of commodity shipments.


Core Debt and Net Debt (Source: Company Reports)

Future Aspects: With respect to Grains, it would continue the grain imports from WA and SA throughout the year. The company is expected to continue to diversify grain origination via GrainsConnect Canada and Ukraine.

Stock Recommendation:In terms of oils, GNC is expected to witness pressure on oilseed, which might impact the margins.The current ratio of the company stood at 1.47x in 1HFY19 when compared to the industry median of 1.42x, which is lower than the broader industry. On the stock performance front, it had provided a return of -11.99% and -18.93% in the time span of one-month and three months, respectively. Based on the foregoing and volatility in the stock, we have a wait and watch stance on the stock at the current market price of $8.170 per share (up 5.966% on 7 June 2019).
 

Costa Group Holdings Limited

Recent Updates:Costa Group Holdings Limited (ASX: CGC) is a leading horticulture group which is involved in growing of mushrooms, berries, glasshouse grown tomatoes, etc. In addition, it is also involved in packing, marketing, and distribution of fruits, and vegetables. The company with the help of a release updated the market about the change of interest made by one of its director Janette Kendall. The director purchased 6,445 shares via on-market for the consideration of $3.89 per share.

Chairman’s Letter on AGM:The company conducted its Annual General Meeting in which its Chairman stated that the company’s mushroom category had achieved its financial targets for the period with the capacity constraints to be addressed by the expansion of its Monarto South Australian facility. CGC pointed out on its financial results for the six-month period in which it witnessed a revenue of $478Mn, which reflects a decline of 2.4% in comparison to pcp. The EBITDA before SGARA and material items and amortization was declined by 42.0% and stood at $35.3Mn. While NPAT-S earnings stood at $8.5 Mn.


Key Metrics (Source: Company Reports)

What to Expect From CGC:  With respect to the Mushroom Category, it must deal with the lower pricing levels because of extended summer temperature which is affecting short term demand and the previously disclosed commissioning delays at Monarto with the late change in compost technology. The company had provided EBITDA-SL guidance in the range of $140Mn – 153Mn and it is expecting to witness NPAT-SL in between $57Mn to 66Mn.

Stock Recommendation: CGC stated that late Moroccan season had progressed positively with respect to the crop health, but harvest volumes were slow with delayed fruit maturity and increasing competitive pressures on pricing.

The current ratio of the company stood at 1.51x in FY18 in comparison to the industry median of 1.40x, which represents the company’s decent position to address its short-term obligations.With respect to stock’s past performance, it had generated negative returns of 32.15%, 29.92% and 50.81% in the time span of one-month, three months and six months, respectively.

Considering the above stated facts and the negative returns over the past few months, we advise investors to wait for more growth catalyst.Thus, at present, we advise market players to avoid the stock at the current market price of A$3.720 per share (up 2.479% on 7^th June 2019).

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