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GrainCorp Makes Hay As The Rain Falls

Australia | May 12 2022

This story features GRAINCORP LIMITED, and other companies. For more info SHARE ANALYSIS: GNC

After a succession of upgrades, GrainCorp has provided an earnings beat amidst near perfect conditions.

-Despite a flow of guidance upgrades, GrainCorp still beats
-FY23 looking just as promising
-Conditions must eventually normalise
-Dividends aplenty in the meantime

By Greg Peel

A quick glance at the chart of grains-and-oils handler and processor GrainCorp ((GNC)) since the company's privatisation and listing in 1998, and it is clear the stock cycles within a share price range, each cycle representing favourable or unfavourable agricultural conditions.

Those cycles do not only represent the vagaries of Australian weather, but conditions for competing agricultural exporters across the globe.

Listing at an opening price of $7.60, GrainCorp hit $12.82 in 2013, briefly, before settling into a tight range around $8 up until the beginning of 2020. It was then, after three years of devastating drought, Australia burned.

Three months later the share price was $3. Then it rained. And as those in various parts of the country can appreciate by looking out the window, it hasn't stopped since.

From March 2020, the share price has traced a parabolic path back to more than $10. Acceleration followed Russia's invasion of Ukraine and subsequent sanctions against Russia. Together, the two supply about 70% of the world's agricultural products, including wheat, corn, sunflower oil and fertiliser.

Having spent all of 2022 continuously upgrading its earnings guidance, GrainCorp reported its half-year result on Wednesday.

Despite the upgrades, the result still managed to beat most forecasts, thanks to the ongoing demand for Australian grain and oilseeds and strong supply chain margins for grain exports. Management reiterated full-year guidance, but given ongoing momentum this might be in danger of being exceeded.

Given FY23 crop conditions have improved further, brokers suggest FY22 guidance has been de-risked and analysts feels FY23 should exceed consensus expectations. Note that FY22 ends in September for GrainCorp, but winter planting is underway for harvest in what by then will be FY23.

Right now, conditions are seen as near perfect, but will it last?

Ask Dorothea

Of course not, as history dictates agricultural conditions move in cycles. But brokers agree the signs remain positive heading into FY23 as long as La Nina is determined to hang around. 

Conditions will at some point normalise, it's just a matter of when, and may even return to deterioration mode. Given such cycles, one might be forgiven for thinking a grain handler would be inspired to "silo" excess profits during the good times, to be drawn upon in the bad, allowing a utility-style flow of steady if not spectacular dividends. But that's not how listed companies work.

It is incumbent upon listed companies not to be sitting on "lazy" balance sheets, for fear of a market de-rating. Assuming no M&A opportunities (note GrainCorp bought United Malt Group ((UMG)) in 2009 and spun it back out again in 2020), excess profits must be returned to shareholders.

Broker consensus had forecast a 20c dividend with this result, but instead GrainCorp delivered a 12c ordinary and 12c special. More solid dividends and specials are anticipated ahead.

So for now, things don't get much better, and likely won't in the foreseeable future, and the market has already spoken with share price gains. Hence three of the five FNArena database brokers covering the stock retain Hold (or equivalent) ratings. Two remain on Buy for now.

The consensus target price has risen to $10.23, suggesting no upside. But based on FY22 forecasts, GrainCorp will yield 7.7% (fully-franked), and a further 4.4% on FY23 forecasts to date.

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