Graincorp rallies on back of higher wheat prices

Having witnessed the share price seesaw wildly over the past three months, Graincorp (ASX: GNC) shareholders witnessed a 7.60% share price rally this afternoon following a corresponding jump in wheat prices.

Today’s 7.7% jump in wheat prices in Chicago to $8.9325 a bushel follows a resurgence in wheat prices experienced early October – when wheat futures hit the highest level since June 29 just short of $US9.50 a bushel – which saw the stock post a 5%, albeit short-lived rally.

The latest spike in grain prices was triggered by a surge in wheat futures following the market’s reaction to Russia’s decision to renege on a deal, reached in July, allowing Ukraine crops safe passage through the Black Sea to those countries most in need of them.

Russia’s about face to the previous decision to allow some of Ukraine’s most important exports grain exports through the Black Sea – regarded as critical for easing tight world supplies and controlling global food costs – was in retaliation to drone strikes against its naval fleet.

While unsubstantiated, Russia claims that one of the drones might have come from a grain ship that’s part of the Black Sea initiative.

Can the agreement be salvaged?

It’s understood Turkey, the United Nations (UN), along with the EU, are working to have the former agreement – which ended a five-month Russian blockade of Ukraine’s ports – reinstated to curb further impact on already spiralling food inflation.

However, Russia notes any future steps could only be determined after a full investigation into the attack on its naval fleet.

The two parties, alongside Ukraine, agreed to have vessels carrying food from Ukrainian ports sail on Monday, challenging Russia’s decision to back out of the deal.

Recent developments

Graincorp’s share price rallied early August following an upgrade to its earnings guidance for the 12 months ending 30 September 2022.

The range for FY22 underlying earnings (EBITDA) has been raised to $680-730m (previously $590-670m) and FY22 underlying net profit (NPAT) to $365-400m (previously $310-370m).

CEO Robert Spurway attributed the improved outlook to outstanding execution across each of Graincorp’s business areas and expectations for the east coast Australian (ECA) crop in 2022/23.

“We expect another well above average ECA crop in 2022/23 based on crop development we have seen to date, and a favourable 3-month rainfall outlook,” Spurway noted.

At the half year to 31 March, the company posted earnings of $420m, up from $140m over the previous period, while net profit was $246m, up from $51m previously.

The company declared a fully franked dividend of 24 cents per share (cps).

What brokers think

Graincorp’s share price is up 33% over 12 months.

Consensus on Graincorp is Moderate Buy.

Based on Morningstar’s fair value of $8.79 the stock appears to be undervalued.

Based on the five brokers that cover Graincorp (as reported on by FN Arena) the stock is currently trading with 16.2% upside to the target price of $9.71.

Due to good planting conditions, Macquarie expects earnings momentum to continue into FY23, and retains an Outperform rating, while the target price eases to $11 from $11.10. (11/08/22).

Having concluded that earnings look set to decline over FY23-25, Morgans made only small upgrades to its earnings forecasts for Graincorp.

The broker retains a Hold rating with the target rising to $8.99 from $8.90 (08/09/22).

Graincorp will report FY22 results on November 16, watch out for broker updates in the days that follow.

Graincorp share price over 12 months.