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Morningstar | GrainCorp’s Asset Sale Fetches Good Price, but Takeover Bid Remains; FVE to AUD 9.60

No-moat GrainCorp’s plan to sell its Australian bulk liquid storage terminals for AUD 350 million follows management’s stated goals from its annual general meeting to unlock value through portfolio reviews, despite the current nonbinding takeover offer from Long-Term Asset Partners. We think GrainCorp received a solid price for the terminals and have raised our fair value estimate to AUD 9.60 per share from AUD 9.40. Our valuation is the average of AUD 8.80 per share on a stand-alone basis (up from AUD 8.30 previously), and LTAP’s AUD 10.42 per share takeover offer, which we continue to assign a 50% probability of occurring. The shares currently trade near our fair value estimate.

The sale price for GrainCorp’s eight bulk liquid terminals in Australia represents a good deal. ANZ Terminals, a private operator in the region, will pay AUD 350 million for the assets, which implies a 13 times multiple to expected 2019 EBITDA of AUD 27 million, per GrainCorp management. This is higher than the 11.6 times that our stand-alone value implies versus depressed 2019 EBITDA, and it's well above the approximately 7 times enterprise value/EBITDA multiple implied by our valuation in a more normalised long-run earnings environment. The higher valuation reflects the generally stable nature of these assets’ earnings power, driven by solid profitability and good growth prospects. The AUD 350 million price makes up about 12% of GrainCorp’s enterprise value implied by our stand-alone valuation, while the terminals’ EBITDA is roughly 11% of our forecast AUD 240 million in fiscal 2019, and--assuming a low-single-digit annual growth rate--approximately 7% of our normalised long-run EBITDA forecast.

Offsetting the positive impact from the terminal sale, GrainCorp will sign an agreement with ANZ Terminals to remain a customer of the assets, given their use in GrainCorp’s own oils supply chain. Also, management said it has not yet struck a deal for the New Zealand bulk terminal business, which is slightly smaller than the Australian business but more ingrained in GrainCorp’s current supply chain. While such a transaction could still occur, we anticipate the company would need to lease back a sizeable portion of the sold assets.

Importantly, we don’t think this transaction upends the LTAP offer on the table. Under the sale agreement of the bulk terminals, GrainCorp has agreed to not enter into a change of control or material alternative transaction before May 10--less than 10 weeks from today. Considering that LTAP hasn’t even made a binding offer, the short time frame suggests the two parties can comfortably continue to discuss options and due diligence without delaying any potential takeover transaction.