Graincorp Redux: LTAP's Offer May Necessitate A Bump

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Equity Bottom-Up

We’ve increased our fair value estimate for <a href="https://www.smartkarma.com/entities/18531" target="_blank" data-smartkarma-citation="entities:18531:1">GrainCorp Ltd (GNC AU)</a> to AUD 8.70 per share from AUD 8.50 due to the time value of money. We view shares as fairly valued, having fallen roughly 18% since hitting a high in June 2017. The firm’s expansion into malt and oilseed crushing have helped diversify earnings, but GrainCorp remains a highly cyclical business leveraged to volatile seasonal conditions. We expect strong near-term organic growth, as well as potential acquisitions as the firm seeks further vertical integration opportunities. However, despite an extensive and valuable infrastructure network, we still don’t believe GrainCorp has carved an economic moat.The business is exposed to cyclical grain volumes, which are driven by seasonal factors. High fixed costs further affect earnings. For fiscal 2017, we expect a record Australian crop harvest, strong export volumes, and improved cost control to boost underlying EBITDA 64% versus the previous corresponding period, to AUD 420 million, tracking management’s guidance for AUD 385 to AUD 425 million. However, our long-term forecasts assume normalised earnings, based on a return to average Australian crop production, offset by a continued rebound in grain exports and further mid-single-digit gains in malt revenue. We assume overall revenue growing at about 3% annually, coupled with operating margins rising to north of 6% within the next five years from about 5% in fiscal 2017.Despite rising margins from fixed cost leverage, we don’t expect GrainCorp’s return on invested capital, or ROIC, to surpass its weighted average cost of capital, or WACC. Adjusted ROIC has averaged only about 6% during the past five years, stemming from the business’s capital intensity, network inefficiencies and, in recent years, a global oversupply of grain that has negatively impacted pricing and export volumes. We forecast average adjusted ROIC of 7.7% for the group for the next five years, eventually just reaching the 9% WACC by fiscal 2021.Analyst: Adam Fleck, CFA

We’ve increased our fair value estimate for GrainCorp Ltd (GNC AU) to AUD 8.70 per share from AUD 8.50 due to the time value of money. We view shares as fairly valued, having fallen roughly 18% since hitting a high in June 2017. The firm’s expansion into malt and oilseed crushing have helped diversify earnings, but GrainCorp remains a highly cyclical business leveraged to volatile seasonal conditions. We expect strong near-term organic growth, as well as potential acquisitions as the firm seeks further vertical integration opportunities. However, despite an extensive and valuable infrastructure network, we still don’t believe GrainCorp has carved an economic moat.The business is exposed to cyclical grain volumes, which are driven by seasonal factors. High fixed costs further affect earnings. For fiscal 2017, we expect a record Australian crop harvest, strong export volumes, and improved cost control to boost underlying EBITDA 64% versus the previous corresponding period, to AUD 420 million, tracking management’s guidance for AUD 385 to AUD 425 million. However, our long-term forecasts assume normalised earnings, based on a return to average Australian crop production, offset by a continued rebound in grain exports and further mid-single-digit gains in malt revenue. We assume overall revenue growing at about 3% annually, coupled with operating margins rising to north of 6% within the next five years from about 5% in fiscal 2017.Despite rising margins from fixed cost leverage, we don’t expect GrainCorp’s return on invested capital, or ROIC, to surpass its weighted average cost of capital, or WACC. Adjusted ROIC has averaged only about 6% during the past five years, stemming from the business’s capital intensity, network inefficiencies and, in recent years, a global oversupply of grain that has negatively impacted pricing and export volumes. We forecast average adjusted ROIC of 7.7% for the group for the next five years, eventually just reaching the 9% WACC by fiscal 2021.Analyst: Adam Fleck, CFA

Lifting GrainCorp's FVE, but Shares of the No-Moat Firm Look Fairly Valued

Graincorp Ltd A

Lifting GrainCorp's FVE, but Shares of the No-Moat Firm Look Fairly Valued