Graincorp Limited

Severe Drought Impacting Bottom-Line in 1HFY19: Graincorp Limited (ASX: GNC) is engaged in the business of agricultural activities grain storage, handing and freight services on Australia’s east coast.

The company in recent past, announced the proposed sale of its Australian Bulk Liquid Terminals business to ANZ Terminals, subject to a condition that GrainCorp did not enter into a change of control transaction or other material alternative transaction before 10 May 2019. The company updated it has fulfilled the conditions now. The sale is subject to certain other conditions and regulatory approvals as well, including Foreign Investment Review Board and Australian Competition and Consumer Commission, with whom the parties intend to cooperate closely.

The company is targeting an implementation of the demerger by the end of CY19. It is expected to be implemented through a scheme of arrangement, subject to shareholders, court & regulatory approvals and the Board. The creation of a separate entity resulting from the demerger of MaltCo, will involve some incremental costs which is likely to be offset by cost reduction initiatives to be taken post demerger.  


Consolidated Income Statement 1HFY19 (Source: Company Reports)

Financial Performance in 1HFY19:The underlying EBITDA for the group stood at $27 million in 1HFY19 as compared to $119 million in 1HFY18 and an underlying net loss after tax came in at $48 million in 1HFY19 compared to net profit after tax of $36 million in 1HFY18, primarily driven by challenging period in grains and oilseeds, including severe drought conditions in Eastern Australia and grain flows that have been disrupted by grain trade conditions. The revenue, however, improved by 25.5% to $2,492.9 million in 1HFY19 compared to the prior corresponding period primarily with an increase in the grain segment followed by the Malt segment.

The net debt gearing for the group was significantly higher at ~42.0% back of higher inventory levels and timing of commodity shipments leading to increase in receivables.

What to Expect:Going forward, the group expects the robust demand for Malt products to continue in 2019 and northern hemisphere summer and further benefits to be derived from the continuous improvement program in Foods during the second half. Moreover, the management expects the challenging conditions to be continued in eastern Australia in the second half. The FY19 full year performance of GrainCorp remains subject to several conditions including impact of global crush margins on Australian edible oils, the 2H19 receivals, port elevations and grain import volumes in East Coast Australia, global grain trading conditions, new season grain trading opportunities in Q4 and foreign exchange movements.

Stock Recommendation:The stock performance was significantly volatile with negative returns of 18.92% in last month and 5.87% in past six months. Considering the probable demerger along with the expected pressure on bottom-line numbers of the group driven by impact of natural calamities, we advise a “Watch” stance on the stock at CMP of $7.440.   

Reliance Worldwide Corporation Limited

Revised EBITDA guidance impacted the stock performance: Reliance Worldwide Corporation Limited (ASX: RWC) is into water delivery, control and optimization systems. Products include plumbing products with many push-to-connect brass (PTC) fittings, PEX pipes and engineered plumbing support systems.

As per the trading update provided by the company, each of RWC’s operating segments is being affected by market specific factors which are negatively impacting performance and results with the progress of 2HFY19. RWC expects FY2019 EBITDA to be in the range of $260 million to $270 million. The previous FY2019 EBITDA range advised by RWC was $280 million to $290 million, subject to, among other things, an assumption that a modest freeze event would be experienced in the USA.


Financial Highlights 1HFY19 (Source: Company Reports)

The net sales for RWC was up by 50% to A$544.2 million in 1HFY19 as compared to A$362.6 in 1HFY18 primarily backed by robust revenue performance across all 3 segments of Americas, Asia Pacific and EMEA (+425% including John Guest sales post acquisition). The adjusted EBITDA for RWC was up by 65% to A$130.8 million in 1HFY19 compared to A$79.3 million in 1HFY18, with the margins benefiting from John Guest business and increased scale and efficiency in operations.

The gross margin, however, was negatively impacted by processing higher cost copper (which is expected to be substantially reversed in the second half of FY19) and one-off raw material quality issues and new equipment start-up challenges.

Expected Synergies From John Guest Acquisition:  The company expects continued top line growth in all regions, including the current expansion in the core business and growth in new products, full year contribution from John Guest group, continued focus on margin and overhead cost control and realisation of synergies from the John Guest acquisition. The expected realised synergies to be achieved is $20 million p.a. on a run rate basis (excluding one-off integration costs) by the end of FY2019, whereas the annual synergy realisation is expected to exceed $30 million on a run rate basis by the end of FY2020.

Stock Recommendation: The stock yielded a YTD return of 3.83%. With robust financial performance against the prior corresponding period, RWC was able to derive several operational synergies on the back of John Guest acquisition. Decent fundamentals of the company including sales growth in Americas, balance sheet with a pro-forma leverage ratio at 1.71x, and cash flow generation from operations supported the stock thesis; however, the latest trading update leads us to recommend a “Hold” rating on the stock at the current market price of $3.890.  

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