Treasure Chest | Oct 19 2011
By Greg Peel and Rudi Filapek-Vandyck
What?
Stockbrokers are increasingly tipping Graincorp ((GNC)) as likely to provide investors with a positive surprise as expectations are growing that recent favourable rainfall will result in another bumper wheat crop in 2011/12. RBS for one expects Graincorp to beat guidance at the upcoming FY11 results release on November 24th. RBS has upgraded earnings forecasts well above market consensus and even dared to go as far as to predict the Graincorp share price will only rise further in the lead-up to the results release.
Why?
The Australian Bureau of Agricultural & Resource Economics & Sciences (ABARES) is forecasting an Australian east coast wheat crop of 19.5Mt and Australian Crop Forecasters (ACF) only 17.8Mt. On the back of recent rainfall Citi analysts now forecast a crop in excess of 19.5Mt. RBS also forecasts a record crop.
Background
Citi agricultural sector analysts have been investigating drivers of agricultural production and agribusiness profitability and have come to the statistical conclusion that wheat yields in Australia are heavily correlated with rainfall in the two specific months of September and October. Following a dry June-July, rainfall this September-October has been above average. The analysts suggest wheat yields of two tonnes per hectare are attainable which would be 40% above the five-year average, and would flow into agri sector earnings and share prices.
Global economic uncertainty and concerns over government policy has hit rural sector confidence, the broker notes, yet positive conditions, favourable weather, robust grain prices and improved livestock yardings provide farmers with otherwise little reason to be concerned. Western Australia has also enjoyed much improved seasonal conditions over the past six months which bodes well for Elders and Nufarm ((NUF)).
The problem for Nufarm is one of sustained retail price pressure on its key herbicide Round-Up, which has fallen 11% this year in price despite strong demand due to the lofty currency and competition from imported products. Citi retains a Neutral rating on NUF.
Graincorp is Citi's top pick given its exposure to seasonal conditions and an attractive valuation at 8.8x FY12 earnings. Ridley's Buy rating reflects its M&A attraction, and the Buy on Elders comes with a High Risk caveat.
RBS notes Graincorp has a track record of surprising to the upside and the stockbroker has upgraded its earnings forecasts by 11.6% and 18.7% in FY12-13 to account for the expected 2011-12 record east coast grain crop. RBS retains a Buy ahead of GNC's FY11 result due on November 24.
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