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Date : 24/06/2022

Graincorp Ltd

ASX :

GNC

Market Cap : $2.15 Billion

Dividend Per Share : $0.34

Dividend Yield : 3.70 %

Buy

52 Week Range : $4.98 - $10.86

Share Price : $9.17

Quality defensive stock with a positive outlook for FY23, a “Buy” for us.

Company Analysis

GrainCorp (ASX: GNC) is a leading diversified Australian agribusiness with an integrated operating model connecting growers to domestic and international consumers in over 50 countries.

The Company has partnered with growers and producers for over 100 years to connect them with domestic and international customers. Through its skills and capabilities developed in accumulating, storing, and handling agricultural commodities over many decades, GrainCorp is now managing a wide range of grains, pulses and oilseeds and producing edible oils, biofuel components and animal feeds, as well as oils and shortenings for the food production industry.

With innovative processes and leading technology, the firm has shown its robust capabilities in finding new ways to make its supply chain even more efficient without compromising on the superior Quality Assurance that GrainCorp has become known for.

What we like about GrainCorp are its diverse interests. It ranges from developing infant formula products, shipping woodchips, collecting Used Cooking Oil to make biofuel components, or investing in developing an eco-friendly new animal feed from Australian seaweed.

Outside of Australia, GrainCorp sources locally from producers in the UK and Ukraine and through its joint venture in Canada. With its marketers in China, India, and Singapore, we have seen GrainCorp utilising its global network of grain, pulses, and oilseeds specialists to ship its products worldwide.

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Source: Tradingview

GrainCorp exhibits outstanding operational execution across all its diversified business units

FY21 was another outstanding year for GrainCorp

We have been pleased with GrainCorp’s financial report for FY21. Thus, the Group delivered outstanding results, driven by exceptional operational execution and the support of high global demand for Australian grain and oilseeds. The strong performance was delivered despite the ongoing challenges of the COVID-19 pandemic. During the year, all GrainCorp businesses continued to operate without interruption, including handling 34.4mmt of grain and oilseeds and operating its processing assets at close to full utilisation.

GrainCorp reported an impressive FY21 underlying EBITDA of $331 million, which is way above FY20’s $108 million, which contributed to an underlying net profit after tax (NPAT) of $139 million. This was achieved despite the result including the maximum annual payment of $70 million, by GrainCorp, under the Crop Production Contract (CPC), a 10-year contract entered in June 2019. The delivery of such a strong result post the CPC payment is proof of an outstanding operational execution across the Group’s business segments.

Accordingly, the Company declared a final dividend for FY21 of 10 cents per share, fully franked, bringing the total dividends for FY21 to 18 cents per share. GrainCorp has a dividend payout ratio of 50% to 70% of underlying NPAT, and this is applied against “through-the-cycle” (TTC) NPAT to ensure a more consistent dividend profile. GrainCorp also intends to return additional capital to shareholders via an on-market share buy-back of up to $50 million. We believe that the increase in dividend and proposed buy-back reflected GrainCorp’s strong financial position, which gave us strong confidence in the Company’s positive outlook.

GrainCorp is building a platform for growth

FY21 was a crucial year for the Company. GrainCorp worked on developing its strategy to support its vision of growth while creating sustainable long-term value. To achieve that, GrainCorp has elaborated two key elements in its strategy: strengthening its core and pursuing targeted growth opportunities.

  1. GrainCorp has significantly progressed by strengthening its core and optimising its infrastructure assets in recent years. This has allowed the Company to provide “through-the-cycle” (TTC) earnings guidance for the first time and the additional operating initiatives announced during the year that will facilitate the planned increase in TTC earnings by 2023 and 2024.
  2. GrainCorp is also exploring growth opportunities in adjacent sectors where the Company can leverage its experience and expertise. These sectors include alternative protein, animal nutrition and digital/AgTech, where GrainCorp is well-positioned through its existing assets, capabilities, and customers.

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Source: GNC

A refreshed board with new experienced Directors

In October last year, GrainCorp saw two new Non-executive Directors joining the Company’s Board, Ms Nicki Anderson and Mr Clive Stiff. Their appointments followed an extensive search process, with a comprehensive review of both existing Board skills and the additional and complementary skills likely to be required for the future.

Ms Anderson has extensive experience in strategy, sales, marketing, customer experience and innovation in the food, beverage and consumer goods industries. Ms Anderson’s most recent senior leadership positions included roles with Coca-Cola Amatil, Cadbury Schweppes, McCain, Nestle and Kraft.

Mr Stiff has extensive executive experience in the fast-moving consumer goods sector and digital and supply chain transformation strategy. He is the former CEO of Unilever Australia & New Zealand, and, before that, he held a range of senior executive roles locally with Goodman Fielder and internationally with Procter & Gamble.

GrainCorp is shifting toward higher-value products

GrainCorp is implementing a strategy that could substantially increase the Company’s value

At the GrainCorp Investor Day in March, the Company announced a new round of operating measures to deliver an additional $40 million in EBITDA by 2023 and 2024. These include expanding the Company’s bulk materials offering at GrainCorp ports, shifting the firm’s processing towards higher-value products, and implementing LEAN practices in Foods and Oilseeds.

GrainCorp has taken significant steps towards greater earnings consistency and reduced seasonal variability through its Crop Production Contract and other key operating initiatives. To date, these initiatives have delivered over $100 million in value.

As part of the expansion of GrainCorp’s bulk material, existing port infrastructure has been repurposed to handle cement imports, and new opportunities are being pursued with wood pellets, woodchips and mineral sands. With greater earnings consistency and visibility in the Company’s core business, GrainCorp has provided TTC earnings guidance based on average crop conditions and average grain volumes. This notional TTC figure will rise to $240 million by 2023 and 2024. It is worth noting that larger crops deliver significantly more value, as demonstrated by the FY21 financial result. GrainCorp is also targeting new growth opportunities and revenue streams in areas where the Group is well placed to leverage its supply chain infrastructure and build on its track record in research, development, and innovation.

During the year, we have seen GrainCorp substantially progress on several opportunities, including:

  • Animal nutrition: GrainCorp, together with CSIRO and other key partners, invested in FutureFeed, a livestock feed additive made from the seaweed Asparagopsis. Feedlot trials have shown that using Asparagopsis in feed can lead to an 80% reduction in methane emissions and positive trends in productivity. Last year, GrainCorp built further capability in measuring and formulating feed solutions associated with the FutureFeed technology.
  • Alternative protein: The Company is also working with CSIRO to develop a range of value-added plant protein options derived from commodities such as canola, faba bean, and soybean.
  • Agriculture Technology (AgTech): GrainCorp acquired a 15% stake in AgTech company Hone, a leading developer of mobile technology that analyses grain quality, soil carbon and other agricultural products and inputs. Hone’s handheld devices provide real-time crop chemical analysis with high-level accuracy, consistency, speed of analysis, and portability.

GrainCorp is streamlining its business

GrainCorp also announced its intention to generate $50 million in cash from FY21 to FY23 through selling non-operational sites and assets. During the year, the Group generated $26 million towards this target, including through the sale of its former Foods site in Murrarie, Brisbane, for $18 million, together with several regional sites that are no longer part of the Company’s core east coast Australian (ECA) network.

Company Updates

FY22 onward outlook: GrainCorp is intended to continue delivering its operating initiatives and progress against its strategic growth themes

The winter crop size across the Australian east coast is again forecast to be well above average. In response, and with work underway to deliver the additional one million tonnes of storage announced in August last year, GrainCorp is well placed to support growers through harvest and benefit from ongoing demand for Australian grain exported through its port assets. A large volume of grain carry-out, totalling 4.3 million tonnes, has ensured strong ongoing export demand, which can be met into and beyond the harvest of the 2021 to 2022 crop. We also expect GrainCorp to have significant grain carry-out at the end of FY22, providing benefits well into FY23. The combination of relatively high global grain and oilseed prices, and the ongoing demand for Australian grain, supports strong operating margins across the Group’s Agribusiness segment. Oilseed crush margins remain favourable, and we continue to see consistent performance of the Numurkah crushing plant. Throughout FY22, we expect GrainCorp to continue delivering its operating initiatives and progress against its strategic growth themes.

GrainCorp priorities and growth objectives are clear. It is to strengthen its core activities, which involve improving the strength of its underlying business, lifting the returns from its supply chain and processing assets, and leveraging GrainCorp’s deep capabilities across its organisation. Pursuing targeted growth areas involves identifying and entering adjacent markets where GrainCorp has a strong right to win. Thus, the Company is actively looking for new opportunities and revenue streams, focusing on macro trends impacting food and agricultural consumption. We believe GrainCorp can do this by leveraging its strong track record of partnering with grain and oilseed growers, its extensive supply chain infrastructure and its long history of collaborating with its customers in product development and innovation.

Source: GNC

Strengthening its core business

Expanding east coast Australian (ECA) network port services

GrainCorp strives to diversify its earnings and improve its ECA port utilisation by expanding its imports/exports of bulk materials such as cement, fertiliser, woodchips and sand. In FY21, the Company repurposed its existing port infrastructure to handle cement imports as part of a long-term customer agreement. GrainCorp also pursued additional opportunities with wood pellets, woodchips and mineral sands. In FY21, GrainCorp delivered a record contribution margin in its bulk handling business.

Property portfolio management

GrainCorp has identified opportunities to monetise non-operational assets, which we believe will help the Company to maximise its balance sheet and capital employed efficiency. We expect GrainCorp to generate approximately $50 million in operating cash from its property sales from FY21 to FY23, including $26 million delivered in FY21.

Integrated canola supply chain

GrainCorp is seeing the benefits of its integrated, end-to-end canola supply chain, which begins from farm origination and storage, to crushing, refining, food production and waste oil recycling into renewable fuels. By applying LEAN processes and focusing on sustainability and traceability, GrainCorp is generating improved efficiencies and customer outcomes.

Developing new business themes: growth opportunities

Develop alternative protein solutions

Demand for alternative protein is growing rapidly, driven by consumers’ desire for healthy, sustainable and traceable food options and an increasing global population. As a leading handler of agricultural commodities and with a track record in food science and innovation, GrainCorp is well-positioned to participate, using its capabilities to create new, high-value alternative protein products. GrainCorp is working with CSIRO to develop a range of value-added plant protein options derived from commodities such as canola, faba bean and soybean.

Develop the Agriculture Tech industry with the acquisition of a 15% stake in Hone

GrainCorp has acquired a 15% stake in AgTech company Hone, a leading developer of mobile technology that analyses grain quality, soil carbon and other agricultural products and inputs. Hone’s handheld devices provide not only real-time crop chemical analysis but also provide enhanced accuracy, consistency, speed of analysis, and portability. Hone offers significant potential in soil carbon testing and carbon sequestration assessment, which could open new offset prospects for growers and the industry.

Animal nutrition – GrainCorp is investing in FutureFeed

GrainCorp has invested in FutureFeed, a company formed by CSIRO to take a methane-busting seaweed to market. FutureFeed will commercialise a livestock feed additive made from the seaweed Asparagopsis, which has been shown to reduce methane emissions in cattle by more than 80%. FutureFeed is developing a full value chain, from seaweed production to processing and feed manufacture, to supply beef and dairy industries globally.

Industry Analysis

GrainCorp is at the centre of the global agriculture industry

GrainCorp is at the centre of the global agriculture industry. Hence, the Company partners with growers to maximise the value of their crops, connecting them to domestic and global marketplaces through its end-to-end supply chain and infrastructure assets. GrainCorp develops innovative solutions to create high-quality and sustainable products across the food, feed, and industrial sectors.

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Source: GNC

East Coast Australia (ECA)

As the largest grain storage and handling network on the east coast of Australia (ECA), GrainCorp operates more than 160 regional sites and seven bulk port terminals, connected by road and long-distance rail infrastructure. GrainCorp’s network’s strength is its supply chain expertise and a market-leading digital platform, CropConnect, that services over 10,000 growers and buyers. Through its port network, the Group handles a range of other bulk materials comprising cement, woodchip and fertiliser, enabling the firm to maximise its port asset utilisation. GrainCorp is handling approximately 26 million tonnes of its product per year from its ECA network.

OilSeeds

GrainCorp is the leading oilseed crusher and refiner in Australia, supporting the local oilseed industry by producing a range of canola oil and canola meal for local and international markets. The Company’s oilseed crushing and refining operations provide the components for well-diversified applications across various industries, such as cooking oil, spreads and shortenings, prepared foods, animal meals, cosmetics, lubricants, and fuels, to name a few. Canola oil is also used globally as a renewable fuel feedstock. GrainCorp exports about 4.9 million grains annually.

GrainCorp has an integrated global supply chain

The Group’s integrated supply chain enables GrainCorp to originate grain, pulses and oilseeds from key growing regions worldwide, connecting to over 350 customers in more than 50 countries. The Company sources commodities from all parts of Australia and producers in the United Kingdom, Ukraine and Canada through its joint venture GrainsConnect Canada, connecting to customers via marketers in Australia, New Zealand, Canada, the UK, Europe and Asia.

GrainCorp’s Foods business produces an extensive range of products for iconic brands and works with some of the biggest players in the commercial food market. GrainCorp leverages its food science and innovation expertise to develop tailored solutions for its customers, including specially blended inputs for the infant formula, bakery, and large-scale food manufacturing industries.

GrainCorp operation in Ukraine: Impact on global trade

GrainCorp has a small trading team in Kyiv, with no fixed assets and originates Ukrainian grain for international customers. GrainCorp has no forward financial exposure in Ukraine and has taken a full provision against grain held. Due to the armed conflict in the region, the supply from the Black Sea region has been disrupted. Buyers are seeking alternative sources for grain, oilseeds and vegetable oils. Consequently, GrainCorp is seeing strong demand for Australian, Canadian and UK soft commodities. In response to that situation, GrainCorp is implementing the necessary measure to position itself to play a role in this supply.

Source: GNC

Investment Thesis

GrainCorp continues to deliver record performance across the board

GrainCorp has delivered another record half-year result with a strong EBITDA of $427 million compared to HY21’s $140 million. Strong earnings contributed to an NPAT of $246 million during the period, well above FY21’s NPAT of $51 million. As a result, the Company declared an interim dividend of 24 cents per share (cps) fully franked. GrainCorp is showing confidence; therefore, its FY22 guidance is aligned to a strong outlook with a projected underlying EBITDA in the $590 to $670 million range. Accordingly, the Company expects to report for FY22 an underlying NPAT between $310 million and $370 million.

Overall, the Group recorded a statutory net profit after tax (NPAT) of $246 million for the half-year ended 31 March 2022, compared to a statutory net profit after tax of $50.5 million for the previous corresponding half-year. Revenue increased by an impressive 50% to $3.8 billion versus $2.5 billion during HY21.

GrainCorp’s half-year result reflects excellent performance across all business areas and resilience in the Company’s supply chain. The record performance during the period was supported by the strong global demand for Australian grain, oilseeds, and vegetable oils, which has remained elevated after two consecutive bumper crops in east coast Australia and during a tight global supply. Strong demand was mainly induced by the conflict in Ukraine and the resulting Black Sea trade disruptions. These recent events have also created uncertainty in global grain markets, prompting buyers to seek alternative sources of supply. This has further increased demand for Australian commodities.

Furthermore, GrainCorp has benefited from accommodative weather conditions with recent climate patterns and continued La Niña conditions which have provided excellent planting environments for the 2022 to 2023 winter crop. This gives us confidence in GrainCorp to build its grain supplies from Australia’s east coast and further strengthen its export sales and supply chain margins.

Overall, we believe GrainCorp is in a strong position to maximise its opportunities through the current cycle. Moreover, we have seen the Company progressing swiftly on its core business strategic initiatives, particularly in the areas of growth and ESG. Planning is well underway for additional investment in the lead-up to the 2022 and 2023 harvest to efficiently manage the volumes to be delivered by growers.

It is clear that GrainCorp is aggressively looking to expand, as attested by the recent launch of GrainCorp Ventures, a $30 million corporate venture capital fund to invest in AgTech start-ups to build long-term sustainable growth in the Australian agriculture industry.

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GrainCorp is demonstrating diversified, strong operating results

GrainCorp is organised into two business units based on each segment’s operational activity. The Company is well-organised, and these segments are consistent with internal reports reviewed and used by the Group’s chief operating decision-maker, the Managing Director and the Chief Executive Officer in assessing performance and determining the allocation of resources.

Agribusiness

GrainCorp’s Agribusiness is a leading Australian end-to-end grains and oils supply chain business with diversified international grains and oils origination and destination capabilities. The key commodities and products handled and traded by GrainCorp’s AgriBusiness include wheat, coarse grains, oilseeds, pulses and organics.

The Agribusiness segment reported an extraordinary EBITDA during the period, which was up by 200% to $376 million. This reflects an increase in total grain handled to 38mmt versus 30.4mmt in HY21. Moreover, the Company reported strong supply chain margins for grain exports. The increase in opening grain inventories (“carry-in”), from 0.7mmt in HY21 to 4.3mmt in HY22, also contributed to storage and export volumes.

During the first half of FY22, GrainCorp has operated its ports at close to full capacity, exporting an elevated amount of grain to international markets. During this critical time, GrainCorp has proved to have a resilient supply chain and demonstrated the value of its infrastructure assets. GrainCorp’s International business also performed strongly, with increased contracted grain sales to 5.8mmt compared to HY21’s 5.5mmt. The Company also beneficiated from strong export margins from Western Australia following a bumper crop.

Overall, GrainCorp’s Agribusiness reported outstanding results driven by elevated global demand and strong export supply chain margins.

  • East Coast Australia (ECA):
    • GNC experienced a large increase in grain handled following the second consecutive bumper ECA crop.
    • The Company experienced a significant increase in carry-in, contributing to stronger HY22 storage and export volumes.
    • GNC exhibited outstanding supply chain execution, with exports running close to full capacity despite minor flood-related disruptions.
    • Elevated global demand for Australian grain and oilseeds, driven by northern hemisphere supply issues caused mainly by weather events, Ukraine conflict and Black Sea trade disruptions.
    • GNC reported strong end-to-end supply chain margins, demonstrating the significant value of its infrastructure assets.
  • International:
    • Increase its contracted grain sales from ECA and International origins.
    • Strong export margins from Western Australia following a bumper crop.
    • Origination from Canada was adversely impacted by drought, while origination from Ukraine was adversely impacted by conflict and subsequent trade disruptions.
    • GrainsConnect Canada (GCC): Fraser Grain Terminal, Vancouver, completed in the HY22; Volumes are expected to ramp up as production normalises following the drought.
  • Feeds, Fats & Oils (FFO):
    • GrainCorp reported exceptional results from its Agri-energy business, driven by strong execution and high global pricing for renewable fuel feedstocks, including used cooking oil (UCO) and tallow.
    • Feeds were marginally down due to the countercyclical nature of the business to ECA production.

Source: GNC

Processing

GrainCorp’s Processing business is a vertically integrated edible oils crushing, processing, manufacturing and distribution business with a strong and well-invested footprint across Australia and New Zealand.

The Company reported another exceptional EBITDA for its Processing business during the half-year. EBITDA increased by 192% to $70 million due to increased oilseed crush margins and ongoing efficiency improvements. Crush margins were supported by strong global demand for vegetable oils, driven by global production challenges in canola and soybean, disruption of supply out of the Black Sea region, and strong demand for renewable fuel feedstocks. GrainCorp’s Foods business also performed well, with strong demand for refined vegetable oils.

GrainCorp’s Processing strong performance was driven by exceptional Oilseeds and Food results. The first half of FY22 saw strong global demand for vegetable oils:

  • Oilseeds:
    • GrainCorp reports elevated oilseed crush margins, with strong demand for vegetable oils, driven by the global production challenges in canola due to the Canadian drought. Soybean also saw demand increase due to the South American drought and Ukraine conflict, disrupting the supply of vegetable oils out of the Black Sea. Moreover, the strong demand for renewable fuels/feedstock is supported by mandates for biofuel use.
  • Foods:
    • GrainCorp saw an increase in Foods sales volumes during the first half, benefiting from its diversified customer base.
    • The Company also experienced strong demand for refined vegetable oils, driven partially by the Black Sea supply disruptions.

Source: GNC

GrainCorp is in a strong position with an adequate level of debt and strong liquidity supporting growth

Optimum capital structure mix supporting continuous dividend growth

GrainCorp’s balance sheet is in a strong position, with a core cash balance of $129 million in the year’s first half compared to FY21’s first half, with $90m core debt. The Company reported a net debt of $2 billion during the period, higher than during HY21 ($1.4 billion), reflecting increased grain volumes at higher values.

GrainCorp’s Board of Directors has declared a total interim dividend of 24 cents per share, comprising:

  • an interim ordinary dividend of 12 cents per share, fully franked, for the HY22 period, which is well above the HY21 interim dividend of 8 cents per share;
  • an interim special dividend of 12 cents per share, fully franked, reflecting the outstanding HY22 financial performance.

The interim ordinary and interim special dividends will be paid on the 21st of July 2022 to ordinary shareholders at a record date of the 7th of July 2022. GrainCorp’s dividends are in addition to the planned on-market share buy-back of up to a maximum of $50 million, which was first announced by the Company in November 2021.

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Considering the steady dividend distribution and the fact that GrainCorp confirms its FY22 earnings guidance of an underlying EBITDA in the range of $590 to $670 million along with an Underlying NPA in the range of $310 $370 million, we are projecting the Company’s revenue to expand at a conservative CAGR of 2.91% from FY22 to FY26. Moreover, this outlook reflects the ongoing global demand for Australian grain and oilseeds and favourable planting conditions for the upcoming ECA winter crop.

However, it is important to note that our projection is highly sensitive to the macro situation and remains subject to the second-half grain receival and export volumes and the outlook for the 2022 and 2023 winter crops. GrainCorp’s trading condition is also highly affected by the duration and extent of the global trade disruptions caused by the armed conflict in Ukraine. These variable factors are likely to endure throughout the remainder of FY22 and will continue to impact the Company’s operations and earnings.

Recommendation

Both fundamental and macro drivers make GrainCorp one of the best defensive stocks at the moment. The first one is the Company’s strong operating and financial position. Thus, GrainCorp is well-positioned for investment in growth and capital returns. Moreover, the Company is on track for exceptional results onward the second half of FY22 as the firm exhibits a resilient supply chain while implementing disciplined cost control. External to the Company, GrainCorp is also experiencing good macro conditions with ongoing strong global demand for Australian soft commodities. We like GrainCorp. We see GNC as a defensive stock with a positive outlook for FY23, we recommend a “Buy”.

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