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Morningstar | GrainCorp’s Rumoured Malt Divestiture Would Continue the Firm’s Dismantling, but Could Offer Value

No-moat GrainCorp is rumoured to be selling another asset. Per The Australian newspaper, a global buyout fund is in the late stages of securing a purchase of GrainCorp’s global malt processing business, which would follow the recent sale of the bulk liquid storage business (discussed in our March 4 note, “GrainCorp’s Asset Sale Fetches Good Price, but Takeover Bid Remains; FVE to AUD 9.60”). We’ve long been fans of the malt segment. It offers geographic diversification versus GrainCorp’s Australian-focused remaining businesses, and the product is usually supplied under long-term contracts. As such, while malt earnings can be affected by lower beer volumes and strong Australian dollar, they are expected to be relatively stable compared with grain earnings, and should display modest organic growth over time.

But the most important factor in this potential sale is the final price. Based on our forecasts for further annual mid-single-digit revenue gains and EBITDA margins remaining near 15%, we estimate the malts segment is worth roughly AUD 1.5 billion to AUD 1.6 billion, or more than half of our AUD 8.80 per share standalone valuation for GrainCorp.

Our valuation assumption for GrainCorp’s malt segment represents our estimate of a fair price; a sale in our target range would have no change to our fair value estimate. Nonetheless, The Australian reports some market estimates put the malt operations at a value near AUD 1.8 billion, about 12% to 20% ahead of our assessment. Completion at this price would, all else equal, add nearly a dollar to our AUD 8.80 standalone valuation for GrainCorp.

We maintain our AUD 9.60 fair value estimate, which incorporates a 50% likelihood the AUD 10.42 per share non-binding acquisition offer from Long Term Asset Partners, or LTAP, is completed. If malts is indeed sold, it’s possible LTAP could remain interested in acquiring GrainCorp’s remaining businesses and cash garnered in divestitures, leading us to maintain this probability.

At the midpoint of our estimated valuation range, or AUD 1.55 billion, the malts segment enterprise value would represent a multiple of 8.5 times our fiscal 2019 EBITDA forecast of AUD 183 million. This trails the recent sale of competitor Cargill’s malt business to French agricultural firm Axereal for USD 1 billion in December 2018. Although financial details of that deal were not disclosed, the Australian Financial Review cites industry sources noting a 12 times earnings multiple. However, we believe this comparable multiple may be inflated by Cargill’s lower profitability. While Cargill’s malt business could reasonably expect some scale benefits as the third-largest global player, compared with GrainCorp in the number four position, the business has struggled in certain regions such as Australia, and we also understand may be in slightly less attractive geographic locations overall. Supporting this point, GrainCorp management noted only some components of Cargill’s business could be attractive when GrainCorp itself explored potentially purchasing the assets in late 2018. Nonetheless, we note an 8.5 times EV/EBITDA value for GrainCorp’s malt assets compares favourably with the 2009 purchase of United Malt Holdings that launched the firm into the malting business, which was struck at an EV/EBITDA multiple of 5.7 times.

The elephant in the board room remains the AUD 10.42 per share offer from LTAP. Although this bid was non-binding, we venture that a sale of the malts business would likely require substantial restructuring of this deal, should it even progress. However, The Australian notes LTAP may be open to acquiring only the grain handling and logistics segment should GrainCorp continue to sell off the underlying components of its business, which could preserve some of the shareholder value creation we see in the offer price.