Australia | May 23 2012
– Graincorp delivers record interim result
– Guidance for the full year upgraded
– Brokers lift forecasts and price targets
– Valuation remains an issue for ratings
By Chris Shaw
Graincorp ((GNC)) has been the beneficiary of successive bumper harvests, yesterday delivering a record interim profit result of $122 million. That's an increase of 39% in year-on-year terms and was better than the market had forecast.
At the same time management at Graincorp lifted full year net profit after tax earnings guidance by 11% to a range of $185-$205 million, the increase supported by high carry-over and expectations for another strong crop.
On the back of the guidance revisions brokers have been quick to adjust earnings models, Deutsche Bank lifting its net profit forecast for the year by 12% to $198 million and Citi increasing its forecasts by 8% this year and 10% in FY13.
Along with volume adjustments, the changes to Citi's numbers also reflect improved margins in the key malt division and better volumes. In earnings per share (EPS) terms consensus forecasts for Graincorp according to the FNArena database now stand at 100.8c for FY12 and 77.1c for FY13.
While earnings per share is expected to decline in FY13 as weather conditions normalise, Citi points out there is upside risk to estimates given current conservative guidance on receivables for FY12. Any post harvest receivables will be highly beneficial to earnings next year in Citi's view.
As earnings forecasts have been increased so too have price targets, the database showing a consensus price target for Graincorp now of $9.23. This compares to a consensus of $8.69 prior to the interim result.
Despite the changes in broker models there remain some valuation issues for Graincorp. As evidence, the revised consensus price target is around 1% below the current share price following recent price gains.
The gains in the stock of late have been enough for Citi to downgrade to a Neutral rating, moving the broker in line with the likes of Deutsche Bank and RBS Australia who also see valuation for Graincorp as fair at current levels.
Both JP Morgan and UBS remain more positive, the former despite the share price being above its price target at present. For JP Morgan there remains upside potential given possible benefits from reinvestment, which may include efficiency improvements and entry into new markets.
This makes capex an important driver of earnings going forward according to Citi, particularly as weather conditions return to more normal levels following successive good harvests. As well, JP Morgan suggests another source of potential share price gains going forward comes from the realisation of strategic upside in the value of Graincorp's asset base.
In response to the result shares in Graincorp today are down in a weaker overall market and as at 11.50am the stock was 26c lower at $9.39. The price range over the past year has been $6.74 to $9.65.
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