GrainCorp’s Resilience In A Trade War Backdrop

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GrainCorp’s first half FY25 earnings ‘beat’ was undermined by only a modest increase in guidance, due to elevated global grain supply. FY26, nevertheless, offers upside potential.

-GrainCorp’s first half earnings well ahead of forecasts
-FY25 guidance upgrade nonetheless modest
-Elevated global supply pressuring margins
-FY26 seen offering upside potential

By Greg Peel

Agricultural business GrainCorp ((GNC)) posted first half FY25 (ending March) earnings well ahead of consensus forecasts, aided by a crop in Australia that was the third largest on record.

To achieve the ‘beat’, GrainCorp was assisted by earnings diversity across its businesses given elevated global supplies of wheat and oilseeds led to depressed margins for the company’s traditional wheat export and canola crush segments, noting Australia’s crop was once again bumper.

Despite weaker margins, GrainCorp managed to grow earnings by 23% year on year.

Outside of GrainCorp’s Australian exposure established over a hundred years ago, the company has exposure in New Zealand, the UK, Americas, Asia and Ukraine. Aside from geographical diversity, GrainCorp’s diversity of businesses provides a buffer against the volatility of seasonal conditions.

First half agribusiness was boosted by non-wheat commodities (chickpeas and canola seed), with exports tracking towards management’s FY25 guidance range. The performance of GrainCorp’s Nutrition & Energy (N&E) segment turned out particularly strong, Macquarie notes (energy in this case being recycled oil for biofuels), while the Feeds business was a key contributor.

The stock feeds business is counter-cyclical, Macquarie points out, with demand increased in dry conditions when crop production is lower.

XF Australia, a US-based specialist feedlot nutrition consultancy service provider acquired by GrainCorp in 2023, contributed above its business case.

Guidance

While GrainCorp’s first half earnings beat consensus by 16%, this has only translated into a modest 3% upgrade to the mid-point of FY25 guidance. Morgans reminds investors GrainCorp does not have the leverage it once had to a big crop.

GrainCorp was once known as a classic “weather stock” but management has taken steps over the past 5-10 years to reduce its heavy reliance on Australia’s east coast grain harvest volumes. Historically, GrainCorp’s earnings would soar in bumper crop years and plummet during droughts, reflecting high operating leverage to grain volume.

Strategic changes, from portfolio restructuring to diversification and risk management, have make earnings more stable and less dependent on annual crop size.

UBS believes this week’s ‘beat’ appears to have been aided by some mark-to-market timing benefit related to the canola crush, offsetting continued weakness in crush margins, export margin opportunities in chickpeas and canola seed, and outperformance in animal nutrition.

The more modest guidance upgrade looks to UBS to reflect a step-down in the N&E segment in the second half, driven by continued pressure on crush margins (in a seasonally lower second half), and unwinding of first half hedging benefits.

Within FY25 guidance, grain receivals were cut by -0.5mt, reflecting a softer summer crop and lower direct-to-port volumes in Victoria. The summer crop was impacted by flooding in Queensland and northern NSW, with southern NSW and Victora suffering from dry conditions.

Guidance excludes the business transformation costs of migrating to a cloud-based enterprise resource planning (ERP) system. The total estimated cost of the ERP migration program was increased by -$10m to circa -$160-180m, with most of this spend taking place over the second half FY25 and FY26.

While the transition to a cloud-based ERP system makes sense to UBS, at the risk of stating the obvious, near-term there is an ongoing risk of cost overruns and implementation delays naturally associated with a migration of this magnitude.

Underlying earnings guidance is now $285-325m compared to $270-320m previously, and $267.8m in FY24. The wide guidance range reflects (let’s state the obvious again) “uncertainty in global trade policies”.

New season opportunities in the fourth quarter are always the key swing factor, Morgans notes. Grain marketing margins will remain weak due to ongoing elevated global crops. Given ample supply and more expensive grain, Australia faces strong competition.

Agriproducts earnings will likely be impacted by a smaller crop which means GrainCorp will export less grain (high margin) compared to FY25. Morgans also expects N&E earnings will fall due to lower canola plantings and less carry-over grain in Victoria which will likely place further pressure on crush margins.

FY26

No more indicative of the ups and downs of agribusiness is the fact the flooding in that will impact on FY25 transforms into a boost to FY26. GrainCorp noted the “excellent rainfall” (one way of putting it) and soil moisture profile in Queensland and northern NSW sets the potential for a large harvest.

However, the south remains dry. Therefore, autumn and winter rainfall will be very important for dry-sown crops in Victoria and southern NSW. ABARES will publish its first forecast for this winter crop on June 3.

On that basis, UBS currently assumes an average FY26 east coast winter crop of 20mt, but sees potential for the crop to be well above average.

FY26 will also benefit from more operating leverage because GrainCorp will not need to make any crop insurance payment aside from its annual -$6m premium, meaning a potential $70m cost saving if the crop is 24mt or more, compared to the $10m saving currently assumed by UBS.

ABARES’ first estimate of the FY26 winter crop is likely to be conservative, but that said, UBS suggests the key factor that will determine the extent of earnings upside is the margin backdrop, which seems to remain impacted by elevated global grain supply.

Broker Views

GrainCorp had a strong core cash position at the end of the half (excluding commodity inventory) of $296.4m, but that was well down on the $495m of a year ago, Morgans notes. The cash position allowed the company to maintain an interim dividend of 24c fully-franked (14c ordinary and 10c special), while GrainCorp also increased its share buyback target to $75m from $50m, with only $15m bought so far.

Ord Minnett’s investment thesis that GrainCorp’s through-the-cycle earnings and port assets are undervalued remains unchanged. The strong balance sheet and capacity for further capital management initiatives has Ord Minnett retaining Buy with a $9.75 target price.

GrainCorp’s share price has rebounded off its lows as the earnings trajectory has improved and low guidance case de-risked, Macquarie notes. Focus turns to FY26 earnings as the 2025/26 season progresses. Given the core net cash position, GrainCorp remains in a strong position for organic and inorganic growth and ongoing capital returns.

Macquarie retains an Outperform rating with a target increase to $8.95 from $8.76.

UBS continues to like GrainCorp on the back of upside earnings risk building for FY26, capital management, with the stock offering a 6% yield, and resilience in a trade war backdrop.

UBS increases its target to $8.60 from $8.50 and retains Buy.

Morgans’ through-the-cycle, sum-of-the-parts valuation has risen but the broker maintains a Hold rating. GrainCorp owns valuable strategic assets, Morgans agrees, but it may take time for confidence to rebuild in the company’s earnings leverage to favourable cropping conditions.

In the meantime, the share buyback and attractive dividend yield should support its share price. While GrainCorp has a strong balance sheet, buyback and high dividend payout ratio, the business transformation program will see its core cash position quickly decline over coming years, Morgans warns.

Morgans’ target rises to $8.20 from $8.04.

Bell Potter’s Hold rating and $7.45 target are unchanged. GrainCorp delivered a stronger result in crushing than its global peers and has managed a lower crush margin exceptionally well, the broker suggest, but offsetting this was a softer margin outcome in the Agribusiness unit where trading margins remained tight.

Based on BOM soil moisture, Wheatcast models and three-month outlooks, Bell Potter would anticipate above average FY26 east coast production. But against this, the broker sees forecasts of record global wheat and oilseed production containing margins.

Among the five brokers monitored daily by FNArena covering GrainCorp there are three Buy or equivalent and two Hold ratings. The consensus target is $8.59, but the wide range from $7.45 (Bell Potter) to $9.75 (Ord Minnett) reflects the risk inherent for a global weather-dependent company.

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