Agricultural companies can be tough to value, and consequently, tough to find value in.
Despite strong demand for the product in question, anything from poor weather – and here poor weather is a legit excuse for poor performance – to protectionist practices and trade agreements can all impact both current earnings and future prospects.
Graincorp Ltd (ASX: GNC) is one of Australia's leading agricultural companies, and was forced to release updated 2015 profit guidance this morning as a result of tough market conditions.
Here's the updated forecasts for 2015:
- Eastern Australia grain production to fall from 17.2 to 16.2 million tonnes (mmt)
- Country network receivals to fall from 8 to 7-7.5mmt, leading to lower storage revenue
- Reduced grain exports as a result of lower production and domestic demand being filled first
- Reduced production leading to lower rail utilisation, causing higher levels of unrecoverable logistics costs
- Continued strong demand for most products; lower AUD expected to boost export earnings
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) forecast of $240-$270m before significant items (down from $293m in 2014)
- Net Profit After Tax (NPAT) forecast of $45-$60m before significant items (down from $95 million in 2014)
Graincorp is also expected to book $135m in depreciation and amortisation costs and $7m in 'optimisation' significant items relating to the Oils, Malt and Allied Mills businesses.
As readers can see, the drop in profits is not small, and management was right in warning that 2015 would be one of the toughest on record for Graincorp shareholders.
With profit after tax roughly halving and the potential for a decrease in an already weak 2% dividend, Graincorp looks overvalued at its present levels.
This may reflect an awareness that the company is a long term and cyclical prospect, but whatever the reason I would want to see substantially lower prices before I bought into Graincorp.
Even though I like Graincorp as a company, there are simply better growth and dividend opportunities available right now, rather than having to hold on until agricultural conditions improve.
