GrainCorp (GNC): Bumper-to-bumper

GrainCorp is an integrated grain and edible oils business with a market presence in Australia, New Zealand, Asia, North America, Europe, the Middle East and North Africa. The company’s recent FY23 result was broadly in line with our forecast. We lifted our fair value estimate by 3% to $7.40 per share, principally due to the time value of money. GrainCorp continues to command historically high supply chain margins on the back of three consecutive bumper crops and strong demand for Australian grain. Elevated pricing due to a poor Northern Hemisphere harvest, and disruptions from the Ukraine/Russia conflict, encouraged exports, allowing GrainCorp to maximise utilisation of its processing capacity. Bumper harvests are not typical, however, particularly in combination with globally high grain prices, and we expect GrainCorp's profitability to normalise as cropping normalises. Grain volumes fluctuate from year-to- year, but GrainCorp's value hinges on a normalised crop-growing year, which will not be as lucrative. The latest Australian Crop Report forecasts 2024 east coast winter grain production of about 21 million tonnes, a 30% decline from 2023 production. Pricing has also moderated over the past year as Northern Hemisphere supply improves, with Chicago futures down about 30% since November 2022.

Post the FY23 result, we lift our FY24 net profit forecast by 4% to $124 million, about half the FY23 result, and a far cry from $380 million in FY22. Beyond FY24, we expect eastern Australian winter grain production to normalize at about 18 million metric tons, representing FY26 operating earnings of about $281 million. This is higher than our prior forecast of about $270 million, mostly due to earnings from the acquisition of animal nutrition business XF Australia.