La Niña rains bring mixed blessings for SunRice

A letter from Australian monopoly exporter SunRice (ASX: SGLLV) to grower shareholders, highlighting the headache that weather pattern La Niña is creating for ricegrowers, did little to perturb investors with the share price up 4.45% at the open.

While the continuation of La Niña has been a great for rice production generally with water storages in both the Murray and Murrumbidgee systems at their highest levels in decades, and water prices at low levels, chairman Laurie Arthur notes it is also proving a headache for rice preparation.

Some plantings already delayed

"… while the water availability is positive, with forecasts pointing to La Nina continuing and the current wet weather across the region – the threat of flood is also front of mind for many growers,” Arthur noted.

La Niña typically brings with it increased rainfall across much of Australia and potentially widespread flooding and some plantings have already been delayed, due to rainfall at levels not previously seen at this time of year.

Washout clause

What appears to have pleased the market this morning are revelations that in the event growers are unable to plant as a result of the wet weather conditions, the company has decided that in calendar year 2023 (CY23) the wash-out fee will not be enforced.

Under the terms of SunRice's CY23 pool contracts, a washout clause requires growers have to pay a fee if they do meet a committed volume of paddy.

While management still expects volumes in the CY23 fixed-price contracts to be honoured, it has advised grower shareholders that no wash-out exemption will apply.

"It remains critical for the company to maximise returns to growers that we receive as close to the committed volume of paddy as possible (in both the fixed-price contracts and the CY23 pool)," Arthur noted.

Recent performance

The resurgence in Riverina rice production in the 2021 season to 417,000 paddy tonnes represented a near tenfold increase from the prior year’s crop of 45,000 paddy tonnes – the second-lowest crop on record.

At the full year FY22 earnings (EBITDA) were $91.3m, up 86% on the previous year, based on group revenue of $1.3bn, up 30%.

Net profit (NPAT) was $48.7m, up 167% on the previous period.

A record naturally determined pool paddy price of $428 per tonne for the company's popular bold medium grain was also delivered, and this improved performance allowed the group to distribute total dividends of 40 cents, plus a special dividend of 5 cents per share to B class shareholders.

The company’s total shareholder returns of 443% in the 10 years from 1 May 2012 to 29 April 2022, compared to an ASX 300 accumulation index TSR of 154% over that same time period.

Outlook

During AGM 2022 held late August, CEO Rob Gordon advised shareholders that the company still expects top-line revenue to build in FY23.

Gordon believes SunRice is well placed to benefit this year from an environment in which many key markets are under-supplied, largely due to the impact of severe drought on a number of Northern Hemisphere rice-growing regions.

The company is again expecting another large crop due to continuing strong seasonal conditions.

The company’s share price is up 5.4% over one year.

Consensus does not cover this stock.

Based on Morningstar’s fair value of $8.41 the stock appears to be undervalued.

SunRice share price over 12 months.