Graincorp Limited

GNC Details

Graincorp Limited (ASX: GNC) is an integrated grain and edible oils producer with market leadership in grain storage and as an edible oil processor and oilseed crusher in Australia and New Zealand. The company stores, processes and facilitates the transportation of grains and edible oils. 

Result Performance – For the First Half Ended 31 March 2021 – (H1FY21)

• The Rise in Revenue: Revenue from ordinary activities stood at $2,563.4 million, up 30.8% YoY, driven by the much larger crop and increased grain volumes. Also, the company realized a rise in exports, supported by strong global demand and pricing for Australian grain and oilseeds
• Underlying EBITDA from continuing operations stood at $140 million in H1FY21 from $105 million in H1FY20
• Profit before significant items from ordinary activities after tax attributable to the company from continuing operations stood at $51 million, up 87.7% YoY. However, net profit for the period attributable to the company stood at $51 million, down 87.0% YoY

Key Data (Source: Company Reports)

Outlook:

The company on 12 August 2021, shared an upgraded FY21 earnings guidance. The range for FY21 Underlying EBITDA1 has been increased to $310-$330 million from earlier guidance of $255-$285 million. Further, the FY21 Underlying NPAT is anticipated to be in the range of $125-$140 million from the earlier guidance of $80-$105 million.

The company is seeing a strong performance of the East Coast Australian (ECA) grain business, following the phenomenal 2020/21 harvest. Post-harvest winter receivals and higher summer receivals, supported by a favourable outlook for the upcoming winter crop, have strengthened strong export volumes, forward contracted sales, and supply chain margins. Broadly, the company is seeing significant demand for high-quality Australian grain. GNC plans to see total exports for FY21 at the higher end of previous expectations (7.0- 8.0 million metric tonnes). The company is scheduled to report its final FY21 results on 11 November 2021.

Key Risks:

The company is exposed to strategic reviews by the management, changes to the competitive landscape that result in a change to the underlying assumptions of the strategy, poor cost management, loss of key management personnel, failure to effectively execute a project, or adverse economic shocks and uncertainty. Further, the company is exposed to adverse weather conditions that could shake variability in grain production, resulting in an impact on the volume of grain that the company stores, handles, transports, trades, exports and uses in its business.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Stock Recommendation

The stock posted 6-months and 1-year returns of ~+32.4% and ~+43.9%, respectively. It is currently trading above the average 52-week high price of $6.31 and 52-week low price of $3.44. The stock has been valued using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a correction of low single-digit (in percentage terms). The company might trade at a slight discount to its peers’ median, considering fall in liquidity position in H1FY21 as compared to H1FY20, and a rise in debt-to-equity ratio to 1.56x in H1FY21 versus 1.18x in H1FY20. Considering the aforesaid facts, current trading levels, and valuation, we suggest investors to liquidate the stock. Hence, we give a “Sell” rating on the stock at the market price of $6.145 per share, on 18^th August 2021, 10:31 AM (GMT+10), Sydney, Australia.

GNC Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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