Despite ‘perfect storm’ Morgans downgrades GrainCorp to Hold

Despite the bullish FY22 profit guidance provided by GrainCorp (ASX: GNC) yesterday, which saw the shares climb 12.3%, Morgans has downgraded eastern Australia’s largest grain storage and handling player to a Hold from Add.

Morgans has flagged caution over ‘near perfect’ trading conditions across both grain Marketing and Processing but has raised the target price to $8.06 from $7.90.

The broker had upgraded FY22-24 earnings forecasts by 33.3%,15.8% and 3.9%, respectively, due to upgraded guidance, and with high carry-over grain likely to boost future earnings.

However, the broker’s downgraded recommendation did little to cool the afterglow following yesterday’s result with GrainCorp’s share price up another 1.36% going into lunch today.

Perfect storm

Due to a strong harvest, coupled with supply shortages and adverse weather conditions in the northern hemisphere, GrainCorp guided to underlying net profit after tax of between $235m to $280m in FY 2022, up 69% to 100% over the $139m recorded in FY 2021.

Management also noted that the group’s processing business was also performing well, with oilseeds benefitting from “strong gross crush margins and high utilisation”.

Ahead of the AGM on February 17, GrainCorp’s CEO Robert Spurway reminded investors that in addition to a second consecutive bumper crop on the east coast and strong global demand for Australian grain, supply chain efficiency was helping to offset numerous headwinds, including flooding and a wet, interrupted harvest.

“Notwithstanding, GrainCorp experienced minimal supply chain issues and provided over 1.5 million tonnes of additional storage capacity for growers in time for the 21/22 harvest and broke multiple site receival records across our network," Spurway said.

What other brokers think

• Credit Suisse notes that poorer northern hemisphere production is benefiting Australian grain exports, and suspects Russia-Ukraine tensions could deliver elevated grain marketing profitability. As a result, the broker expects GrainCorp to finish FY22 with a cash balance of $207m, which could support a $1.00 per share special dividend. The broker’s Neutral rating is retained, and the target price increases to $7.17 from $6.78.

• Macquarie believes 'controllable and uncontrollable' factors are lining up well for GrainCorp, and retains an Outperform rating, with the target price rising to $9.48 from $8.04.

• UBS notes while the company's valuation appears cheap, the period may represent peak-cycle earnings. The broker’s Neutral rating is unchanged while the target price climbs 4% to $8.30.

Consensus on GrainCorp is Hold.

Based on Morningstar’s valuation of $6.89 the stock looks to be fairly valued.