GrainCorp lays out plan to ride out El Nino as investors dump its stock

GrainCorp. Photo: Rob HomerInvestors have begun ditching Australia’s biggest listed agribusiness, GrainCorp, as a looming El Niño weather pattern threatens to erode earnings.
Nanjing Night Net

The company’s price has lost much of this year’s gains, plunging 13.7 per cent to $8.73 since early May, when it said a drought-afflicted crop had pushed its interim profit down 40 per cent to $30.2 million.

The Bureau of Meteorology expects El Niño – a weather pattern caused by warming water in the Pacific Ocean off the coast of South America – to hit Australia this year.

Although it has led to severe drought in Australia in the past, farm commodities forecaster, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), says it is difficult to gauge the impact of El Nino on grain production.

“While reduced rainfall is often associated with El Niño, the timing of the rainfall can have a significant effect on crop production,” ABARES said in its latest crop report.

“For example, several of the El Niño events in the past three decades have not had any significant effect on winter crop production in eastern Australia.”

Morgans analyst Belinda Moore said “it is only early days, with threat of El Nino”.

Nevetheless, she downgraded her 2016 earnings forecast for GrainCorp, which was the target of a failed $3 billion takeover bid in 2014 from US agribusiness titan Archer Daniels Midland.

Ms Moore pointed to ABAREs’s estimates for the 2015/16 eastern winter crop, which is expected to be smaller at 14.1 million tonnes, compared with an average of 16.5 million tonnes.

“We have consequently made large downgrades to our forecasts,” said Ms Moore in a note to investors.

Morgans has slashed its 2016 and 2017 profit forecast for GrainCorp by 48.8 per cent and 16.7 per cent respectively.

But Ms Moore cautioned that “a lot can happen between now and harvest”, which runs from October to January. “While the outlook for the 2015/16 crop isn’t great, we stress there is a long way to go until harvest.”

She retained a hold rating on the stock, with a share price target of $9.40.

“Despite the poor seasons, management is not standing still. There appears to a clear strategy in palace to improve ROE [return on investment] and EPS [earnings per share] growth  over time.

“In FY18, GrainCorp is targeting a more balanced portfolio of businesses with one-third of earnings coming from each of malt, oils and storage and logistics. The initiatives in place to strengthen the business along with growth projects should set GrainCorp up for a big FY18”.

GrainCorp managing director Mark Palmquist told investors last month the company was spending $500 million on growth projects to provide earnings stability in drought years.

Projects include a $50 million expansion of its oilseed crushing capacity in Victoria to meet growing demand for products such as canola oil.

It will also spend $US75 million ($96.50 million) increasing its malting capacity in the US, as well as $A200 million storage and rail upgrade called “project regeneration”.

“We are very excited about the benefits this investment will deliver to growers and other customers using our network,” Mr Palmquist said when he announced the upgrade.

“Reduced complexity, faster rail loading times and shorter train cycle times will increase the volume of grain transported by rail and reduce supply chain costs, which translates to improved grower returns.”

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