Graincorp Ltd

Weak first half 2018 earnings:Graincorp Ltd.’s (ASX: GNC) stock fell 1.023% on May 11, 2018 after the company delivered weak first half 2018 results. The company for the 1H 2018 has delivered the Underlying EBITDA of $119 million compared to $236 million in 1 HY17 and Underlying NPAT of $36 million compared to $100 million in 1HY17. The earnings fell due to an approximately 40% reduction in east coast Australia (ECA) crop production, after a near record harvest in FY17. Revenue fell 19.1% to $2 billion and the company announced a fully franked interim dividend of 8 cents per share, which is down from 15 cents in the last period. The company is on track to deliver $25-30 million in pre-tax benefits within 18 months through the restructuring and continuous improvement programs across Grains and Oils. The company has to continuously manage cashflows to ensure that the balance sheet remains strong. Further, the major growth projects within GNC’s capital works program are coming to their conclusion. The company’s stay-in-business capex in FY18 is expected to be $50-70 million, down from recent years and well below depreciation, and is expected to remain at similar levels for the next few years. Additionally, GNC has re-confirmed 2018 full year earnings guidance of $240-$265 million underlying EBITDA and $50-$70 million underlying NPAT. However, it is subject to a range of variables. In addition, the prevailing dry conditions across most of the east Australian grain belt are presenting serious challenges for grain growers, with dry-sowing occurring in many areas. Due to a smaller harvest, the existing take-or-pay rail contracts will present a challenge, however these commitments will expire in FY19. Meanwhile, GNC stock has risen 8.01% in three months as on May 10, 2018 but fell 9% in last one month. Based on the foregoing challenges, we give an “Expensive” recommendation on the stock at the current price of $ 7.740.
 

1H 18 Financial Performance (source: Company Reports)
 

Select Harvests Limited

2018 Crop Update: Select Harvests Limited (ASX: SHV) stock rose 1.124% on May 11, 2018. The company reported harvest of approximately 90% of its total 2018 crop and rest harvest was expected to be completed by the end week of April. Approximately 80% of the crop has been delivered to the Carina West processing facility and rest should be completed by mid-May. Further, 20% of the estimated 2018 crop has been processed. Based on current crack out levels, the company forecasts the crop to be in line with the initial estimate of 15,000MT. Moreover, the company has commitments for 45% of the estimated crop. Market pricing has firmed, and the company is projecting a final pool price between $A8.10 and $A8.50 (commitments hedged at an AUD/USD exchange rate of 0.77). However, the realisation of this estimated price will depend upon the selling price and exchange rate achieved for the uncommitted portion of the 2018 crop. Additionally, California’s February Almond Position Report shows almond shipments up 12.0% compared to the last year and uncommitted inventory down 11.6% versus last year. SHV expects continued strong growth in the consumption of almonds. With 34% of the company’s orchards yet to mature, SHV is perfectly placed to support this increase in demand. As a result, SHV stock has risen 28.99% in three months as on May 10, 2018, and is trading at a very high P/E. Therefore, we give an “Expensive” recommendation on the stock at the current price of $ 6.300.
 

Australian Agricultural Company Ltd

Weak FY 18 performance: Australian Agricultural Company Ltd.’s (ASX: AAC) stock has fallen 30.65% in last six months (as at May 10, 2018) owing to volatile conditions and lower than expected performance. The company for FY18 expects Operating EBITDA to be in the range of $12 million to $16 million compared with FY17 Operating EBITDA of $45.0 million. The Statutory EBITDA loss is expected to be in the range of $(30) million to $(40) million, compared with FY17 Statutory EBITDA of $133.2 million. Further, for FY 18 AAC expects negative Operating Cash Flow in the range of $(38) million to $(42) million, compared with positive FY17 Operating Cash Flow of $29.3 million and a positive asset revaluation reserve adjustment of $32 million to $36 million, relating to the revaluation of AACo’s property portfolio. Moreover, Livingstone Beef is affected due to the elevated cattle price environment resulting in higher cattle procurement costs. Livingstone Beef is expected to contribute an FY18 Operating EBITDA loss of $(18) million to $(22) million. This compares with an FY17 Operating EBITDA loss of $(12.5) million. The Cost of Production has been flagged to increase in FY18, due to the one-off attrition cost, unfavourable seasonal conditions and higher input costs continuing through H2 FY18. The Luxury/Prestige and Premium brand segments have delivered year-on-year price growth for FY18, however, AAC has experienced some price softness in parts of the product portfolio in H2 FY18 driven by increased competitive dynamics and strength of the Australian dollar. The value of live cattle sales undertaken in H2 FY18 is less than half the amount undertaken in H2 FY17. The FY18 Statutory EBITDA expectation also shows a decline in cattle prices relative to the end of FY17, which will result in an expected decrease in AACo’s livestock inventory market valuation in the range of $70 million to $80 million. As of now, we give a “Hold” recommendation on the stock at the current price of $ 1.105.

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