GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports

Business Strategy & Outlook

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, the firm hasn’t carved an economic moat, and forecast returns on invested capital to trail the firm’s cost of capital over the long term. GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favorable weather patterns. Accordingly, it has had some strong years during bumper grain harvests, but with a high fixed-cost base, even after substantial asset reduction, earnings can quickly evaporate in poor seasons. While the company’s upcountry storage network would be difficult to replicate from scratch, on-farm storage is a competitive threat, particularly in drought years when a larger share of the crop moves direct from farm to customer, bypassing GrainCorp’s storage network. Port competition has also increased in recent years, and regulation remains high. In a bumper harvest year, GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports, but in a poor year, these market shares can trend closer to 30% and below 5%, respectively. GrainCorp’s market share of the eastern grain crop stabilized at levels near 40% over time, and export share above 20%, representing an average crop year.

Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore. This is a competitive market, and GrainCorp isn’t having any advantage relative to these large global players. The firm will likely remain at the mercy of Australian grain competitiveness relative to global pricing. Similarly, GrainCorp’s oil crushing and refining business remains competitive. Profitability is expected in this segment to improve due to cost-savings measures and ongoing growth, the segment doesn’t enjoys durable competitive advantages.

Financial Strengths

GrainCorp’s capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to draw down on debt on demand. As at Sept. 30, 2022, core debt (net debt less commodity inventory) was cash-positive and total net debt was AUD 540 million. There’s a risk that earnings pressure in drought-affected years could test debt covenants with its bank lenders. The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. Gearing ratios can be volatile, given the swings in inventory levels. The net debt gearing ratio (net debt/net debt plus equity) sat at over 27% as at Sept. 30, 2022 due to high inventory levels. Accordingly, core debt gearing (core debt/core debt plus equity) was negligible. Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis, but improved to 13 times and 20 times in fiscal 2021 and 2022, respectively.

Bulls Say

With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors.
Global thematic, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp.
Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle.

Company Description

GrainCorp is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp

provides grain marketing services to all major grain-producing regions in Australia, as well as to

Canadian and U.K. growers. The company has also diversified into edible oil refining and supply, and bulk liquid storage.

(Source: Morningstar)

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