Graincorp – basically bread and beer

The agribusiness has growth on the agenda

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

GrainCorp (ASX: GNC) is a leading Australian grain handling company which operates three main divisions.

The logistics business handles grain for third parties, primarily about 30,000 grain producers, and has been doing this under various guises since 1917. It has significant infrastructure in eastern Australia with a total grain storage capacity of up to 20 million tonnes and bulk grain export capabilities handling an average of 5 million tonnes of grain per annum.

GrainCorp also buys and sells more than 4.5 million tonnes of wheat, barley, sorghum and canola on its own behalf each year, both locally and internationally.

Finally, GrainCorp is one of the world's largest commercial malt producers, producing over 1 million tonnes annually for some of the world's leading brewers and distillers.

Outlook

According to a presentation given by Graincorp Managing Director and CEO Ms Alison Watkins last week, the global grain trade is forecast continue growing for the foreseeable future. The industry's growth will be driven by changes in grain consumption patterns and increases in the world population. She said that global grain demand is expected to grow by 1 billion metric tonnes or 50% by 2050 due to 30% rise in population to 9.7 billion and 13% rise per capita due to additional use of grain for animal feed.

Graincorp, while still a strongly cyclical business, is aiming to improve Return on Equity (ROE), maintain a strong cash flow with consistent dividends and grow the scale of the business.

The company is planning to add $40m to its earnings (EBITDA) by the end of its 2014 financial year, with $80-120m capital expenditure through that period. Ms. Watkins gave guidance for EBITDA for the fiscal year 2012 of $385-415m with net profit after tax of $185-205; up from $180m in the previous year.

Dividends

Graincorp had previously announced an interim dividend of 15c and a special dividend of 15c. At the time, Ms Watkins said "Across the cycle our dividend policy is to pay between 40-60% of NPAT.  In strong performance years we are able to 'flex up' and return some additional capital to our shareholders through a special dividend. As a business we are targeting a dividend for shareholders each year, due to the earnings contributions we now have outside our cyclical storage and export activities."

Analysis

Since the deregulation of wheat trading in Australia, Graincorp has transformed itself into an 'international agribusiness'. A few years ago the company was a local monopoly operating in a controlled environment, heavily exposed to fluctuating earnings if the weather was not kind to farmers. The good years were very good, the bad years were awful.

Graincorp is now an international business with 75% of revenue coming from outside the local logistics business. However the local business is still a key profit generator, contributing close to 60% of profits (before interest and taxes) in the first half year so profits are still heavily exposed to weather conditions in Australia. According to a recent ABARE report, crop production is forecast to fall by around 4% in 2012-13 from a record high in 2011-12.

Alternatives

Ridley (ASX: RIC), Ruralco (ASX:  RHL) and Elders (ASX: ELD) all operate in the agribusiness sector in Australia. The Australian Wheat Board  (AWB) was the closest equivalent to Graincorp in Australia but it was sold to Agrium (NYSE: AGU) which then sold the commodity management part of the business to the privately owned Cargill Incorporated.

If you simply want to invest in agricultural commodities, you could consider the BetaShares Agricultural ETF (ASX: QAG)

Foolish takeaway

The demand for soft commodities is growing and will continue to grow. Graincorp looks set to profit from that growth but the variability in the Australian climate has to be a cause for concern. The company's shares are trading at around $9.25 which gives a P/E of about 9.5 and a dividend yield of around 5%.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool contributor Tony Reardon owns shares in Graincorp. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »