EUR 850.00 For Business Accounts Only

Morningstar | GrainCorp Still in Play with Potential Buyer, but Uncertainty Remains; FVE Unchanged at AUD 9.40

We maintain our AUD 9.40 per share fair value estimate for no-moat GrainCorp following the firm’s annual general meeting, based on a 50/50 weighting of the indicative, nonbinding AUD 10.42 bid from Long-Term Asset Partners, or LTAP, and our estimated value of AUD 8.30 per share for the company on a standalone basis. Management noted conversations with LTAP are ongoing, but no binding bid has yet been received. We continue to believe LTAP’s valuation offers a substantial premium for shareholders, but also must overcome hurdles regarding funding, ownership requirements, and due diligence.

Outside of the potential LTAP acquisition, management continues to pursue alternative ways to unlock value in GrainCorp through an ongoing portfolio review. Outcomes here would likely entail sales of solidly performing, but potentially noncore, assets such as bulk liquid storage terminals. However, we don’t currently assign any boost to our standalone valuation as a result of these potential transactions, largely because of uncertainty around the potential prices paid. We think the LTAP offer is likely a much clearer and quicker way to drive excess shareholder value.

GrainCorp also offered an updated outlook on its businesses for fiscal 2019, which tracks our expectations. The year will again be a tough one for the grains segment. The Australian Bureau of Agriculture and Resource Economics, or ABARES, now forecasts a 50% decline in eastern Australian grain volumes, slightly worse than the 46% estimate offered in December. GrainCorp noted receivals have fallen an even greater 62% versus the same time last year, while exports have all but disappeared--not surprising when there isn’t much volume in the region to export. We’ve trimmed our full-year forecasts for this segment, but nonetheless expect a longer-term rebound in a more-normalised harvest, with revenue more than 60% higher five years out and EBITDA margins climbing to more than 7% from our estimated 1% this year.

Conversely, both the malt and oils businesses remain solid, with their outlooks relatively unchanged. Both divisions are operating at high capacity utilisation and are enjoying solid top-line growth. We forecast malt’s EBITDA margin will remain lofty for the foreseeable future, near 15%, and despite some near-term raw-material cost pressure from higher canola pricing in the oil crushing business, we think the long-term margin profile for oils is set to improve to high-single digits over the long run. In all, we see malts and oils generating 95% of GrainCorp’s segment EBITDA this year but see the businesses’ combined contribution remaining nearly two thirds of profits even in a better crop year for the grains segment.