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)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.