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Bell Potter: Graincorp Ltd shares are a sell

Credit: Keith Weller

Shares in Australian grain storage and logistics group Graincorp Ltd (ASX: GNC) have rallied around 15.4% from its February year lows, so is the stock still good value at current levels? 

Certainly Graincorp shares have outperformed other ASX-listed peers over that period, but on a P/E basis, the stock still doesn’t look overly pricey right now.  

According to Reuters estimates, Graincorp is trading on a P/E of 16.4 times, compared to 31.5 times for Nufarm Limited (ASX: NUF), 20.4 times for Incitec Pivot Ltd (ASX: IPL), 13.3 times for Ruralco Holdings Ltd (ASX: RHL) and 8.4 times for Elders Ltd (ASX: ELD). The P/E is also well below the sector level of 38.4 times. 

But it is concerns about crop risks and the 2018 crop season for the group that has market watchers cautious at current levels. They point to low soil moisture levels and a poor rainfall outlook as reasons why investors may be a little too optimistic on the stock right now. 

Credit Suisse cautions that any slippage in rainfall over the coming months would result in downside to Graincorp’s 2018 crop. This is given the rainfall outlook is marginally below median levels and due to the fact that soil moisture levels are low going into the 2018 season.  

It notes that the Bureau of Meteorology is projecting below median rainfall for May-July in Western Victoria and median rainfall for other parts of eastern Australia, after rainfall being ‘very much below average’ during February-April across the eastern seaboard. 

The broker is also discounting any short-term potential upside of Graincorp pursuing a more aggressive restructuring of its storage and logistics business saying it was “not the most likely scenario near term”. 

These concerns led the Credit Suisse to downgrade the stock to “Neutral” from “Outperform”. 

Bell Potter is more negative, arguing that markets are pricing an above-average 2018 season outcome for Graincorp at current prices. The broker on Monday downgraded the stock to “Sell” from “Hold” given the solid re-rating in Graincorp shares and the somewhat pessimistic outlook for this year’s crop season. 

“Traditionally, we  are  comfortable  taking  on  seasonal  risk  in annual  crop  exposures  in  weak  conditions,  however, we  tend  to  favour  stocks  where we see an underlying expansion of through the cycle ROIC and where the stock price is depressed, characteristics we don’t see in GNC at current levels,” it said in a report. 

The ratings downgrades saw Graincorp shares fall more than 5% as of mid-morning Tuesday. 

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