Morningstar | LTAP’s Generous Bid for GrainCorp Falls Apart; We Revert to AUD 9.30 Standalone FVE. See Updated Analyst Note from 06 May 2019
After months of relative silence, Long-Term Asset Partners has withdrawn its AUD 10.42 per share offer for no-moat GrainCorp. We were never convinced the two parties would end up together. Since its announcement, we had assigned the deal only a 50% probability of success, and moved the likelihood of completion even lower, to 25%, on April 4, following the announced demerger of GrainCorp’s malt business. Removing this probability leads us to revert to our standalone fair value estimate of AUD 9.30, suggesting shares are slightly undervalued.We don’t think another bidder is likely, especially at the price offered. As highlighted in our note from Dec. 3, 2018, we viewed LTAP’s bid as a full price, and believe it would have proven a good outcome for shareholders. We also don’t know for certain why LTAP opted to pass. The only comments from the bidder note past five months of due diligence did not support the underlying operational assumptions behind the indicative price. It’s possible the AUD 10.42 bid was built upon unrealistic projections for the business, although we suspect GrainCorp management’s plans to break up the business--announcing the separation of its bulk liquid storage and malts business in recent months--could have also played a part.
GrainCorp will report half-year fiscal 2019 results on Thursday, May 9, and has guided to a further near-term negative AUD 40 million EBITDA impact versus its prior outlook due to continued challenging conditions in its grain handling, storage, and marketing division. This outcome builds on what is already a particularly challenging year for GrainCorp due to the eastern Australian drought, but we continue to expect brighter days ahead. Our long-term forecasts assume normalised earnings, based on a return to average Australian crop production, with the segment’s EBITDA margins climbing back to about 8% from negative levels. As such, the additional near-term degradation doesn’t alter our fair value estimate.
GrainCorp is a food ingredients and agribusiness company. Co. focuses its activities on three main grains (wheat, barley and canola). Co.'s reporting segments are: Storage and Logistics, which include grain receivals, transport, testing, storage of grains and other bulk commodities; Marketing, which markets grain and agricultural products and operates grain pools; Malt, which produces malt products, provides brewing inputs and other malting services, sells farm inputs, and exports malt; and Oils, which includes the processing and crushing of oilseeds. Co. also has a 60.0% joint venture interest in Allied Mills Australia Pty Ltd, a supplier of milled edible flour for human consumption.
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