Consumer Staples

GrainCorp guides to major earnings upgrade amid unprecedented global demand

Fri 08 Apr 22, 10:32am (AEST)
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Key Points

  • The company has continued to operate its ports at close to full capacity
  • Disruption from the war in Ukraine is having a material impact on demand
  • FY22 earnings guidance is now $590-670m, up from the previous $480 – 540m range

GrainCorp (ASX: GNC) was up 7.3% at the open after the grain exporter updated its FY22 underlying earnings (EBITDA) to $590-670m, up from the $480 – 540m range the company guided to on 7 February, while expected FY22 underlying net profit has also increased to $310-370m from $235-280m previously.

In addition to favourable planting conditions for the upcoming east coast Australian winter crop, managing director and CEO Robert Spurway also attributed an improved outlook to the significant ongoing global demand for Australian grain and oilseeds.

Spurway specifically noted the impact that disruption from the war in Ukraine is having on increased demand right now.

“The conflict in Ukraine and resulting trade disruptions in the Black Sea region have created uncertainty in global grain markets, with buyers looking for alternate sources of supply,” said Spurway.

“This has further increased both the demand for Australian grain and oilseeds and export supply chain margins.”

Supply chain resilience

At the AGM in February, GrainCorp noted that high global demand for Australian grain and oilseeds and strong supply chain margins for grain exports was being driven by two consecutive bumper crops in east coast Australia (ECA), coupled with supply shortages in the northern hemisphere.

“Recent weather patterns and continued La Nina conditions have provided excellent planting conditions for the 2022 winter crop to date, building confidence in grain supplies from ECA and further supporting export sales and supply chain margins.”

Despite recent weather-related supply chain disruptions across the ECA, the company has continued to operate its ports at close to full capacity, exporting as much grain as possible to international markets.

Spurway believes supply chain resilience demonstrates both the value of the company’s infrastructure assets and the capability of its operations and planning teams.

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GrainCorp's share price has significantly outperfomed the ASX200 over the last 12 months.

What brokers think

While GrainCorp has remained out of the news for some time, the share price has experienced a rocky ride in 2021. But despite losing ground early in 2022, presumably due to some profit-taking, the stock is still up 60%-plus in the last year.

Based on the brokers covering GrainCorp (as reported on by FN Arena) the stock is currently trading with a -1.0% downside to the target price of $8.60.

Whether today’s earnings upgrade warrants brokers to revise their rating remains to be seen. But based on what it regarded as a far too conservative consensus FY23 earnings forecast, Morgan Stanley recently (06/04/22) initiated coverage on GrainCorp with an Overweight rating and a $10 price target.

While UBS and Credit Suisse are Neutral on GrainCorp (08/02/22), Macquarie retains an Outperform and raises the target price to $9.48 from $8.04, noting that controllable factors and uncontrollable factors are lining up the right way for grain exporter.

Consensus on GrainCorp is Hold.

Based on Morningstar’s fair value of $7.80, the stock appear to be overvalued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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