Consumer cyclical

Graincorp guides to materially higher FY22 earnings

By Market Index
Wed 10 Aug 22, 10:18am (AEDT)
Grain
Source: Unsplash

Key Points

  • Graincorp is now guiding to a sizable 10% kicker to FY22 earnings than originally expected
  • The company has strong expectations for the east coast Australian crop in 2022/23
  • The company is investing in additional bunker storage and grain handling equipment

GrainCorp (ASX: GNC) opened 10% higher this morning after announcing a significant upgrade to earnings for the full year FY22.

The fact that GrainCorp only reaffirmed its former guidance only six weeks ago gives investors some insight into unpredictability of key market variables, especially those around the timing of grain exports, new crop sales and prevailing weather conditions.

At the mid-range, GrainCorp is now guiding to a sizable 10% kicker to FY22 earnings over those originally expected. How much of this increase was genuinely unknown, and how much was about keeping back some good news in the lead-to the full year result in November remains unknown.

Due to strong expectations for the east coast Australian crop in 2022/23, GrainCorp has upgraded its earnings guidance for the 12 months ending 30 September 2022 to $680-730m (previously $590-670m) and FY22 underlying net profit (NPAT) after tax to $365-400m (previously $310-370m).

Perfect storm for exports & margins

Much of the update is being attributed to the crop development that management has witnessed to date, plus a favourable 3-month rainfall outlook.

In short, the company's increase in fourth quarter activity is underpinning [higher] export volumes, forward contracted grain sales and supply chain margins.

Management advised investors that processing and feeds, fats and oils businesses have benefitted from strong ongoing demand for crude and refined vegetable oils, and renewable fuel feedstocks such as those used cooking oil and tallow.

Winter harvest

With GrainCorp’s supply chains nearing full capacity in the leadup to another well above average ECA crop in 2022/23, the company is investing in additional bunker storage and grain handling equipment.

In light of staffing issues across rural Australia, the company is also well underway in its recruitment programme to source harvest casuals across the ECA.

“We are pleased to upgrade our FY22 earnings guidance, with both our Agribusiness and Processing businesses on track to deliver record financial results,” said CEO Robert Spurway.

What brokers think

Consensus on GrainCorp is Hold.

Based on Morningstar’s fair value of $8.49 the stock appears to be undervalued.

As is often the case, broker data (as reported on by FN Arena) is looking a little dated, especially for a stock with fortunes that can turn on a dime.

Late June, Macquarie maintained an Outperform rating and $11.10 target price after concluding that GrainCorp's earnings momentum will continue into FY23, due to another above-average east coast winter crop.

While UBS acknowledges the scope for further earnings upgrades in FY23, the broker maintained a Neutral rating along with a $10.00 target (22/06/22).

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GrainCorp's share price: A five year snapshot

 

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