Pros & Cons From GrainCorp’s Transformation

Australia | Nov 19 2024

FY25 looks like providing a bumper harvest, but weaker grain trading and crush margins due to strength in global crops will keep GrainCorp earnings under pressure.

-FY24 proves a more average year for GrainCorp
-FY25 crop set to be bumper
-Pressure on margins undermines earnings upside
-Strong balance sheet allows for ongoing capital management

By Greg Peel

The rollercoaster that is GrainCorp's ((GNC)) global weather-related earnings continued in FY24. Following three very weak years of Australian drought, two years of La Nina brought record returns in FY22-23. FY24, on the other hand, was a year of mean reversion to a more average performance.

The numbers thus look shocking, but aren't. Revenue fell -21% year on year, earnings fell -53% and profit fell -69%. Cash flow was down -77%. The result was in line with guidance, and largely in line with analyst expectations who commented the result is "solid".

Earnings fell on a combination of a smaller East Coast of Australia (ECA) crop meeting lower grain marketing margins and more normalised oilseed crush margins due to global influences. There was also a significantly smaller fair value gain in GrainCorp's remaining shareholding in United Malt Group.

Despite the big fall in cash flow, GrainCorp was able to reward shareholders with an attractive dividend thanks to a carried-over core cash holding. Make hay while the sun shines, and put it in a silo.

FY25 Outlook

GrainCorp does not typically provide quantitative guidance at its full year (September year-end) result, preferring to wait until the AGM in February when the harvest is completed. Who knows what the weather might do? But qualitatively, GrainCorp has highlighted an earlier start to the FY25 season and indications this year's crop is heading to be up there with the best.

However, the company's earnings leverage to crop size will be weaker than in recent years due to below-average grain trading margins and weak canola crush margins. There have been solid crops elsewhere in the world.

In FY25, GrainCorp will benefit from a well above-average crop following favourable seasonal conditions in Queensland and NSW, though Victoria has been dry. ABARES forecasts ECA winter grain production to be up 22%. This would be the fourth largest crop on record and is some 50% above an "average" year, with early-season grain receivals well ahead of last year. The next update on this crop from ABARES is due on 3 December.