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Credit Suisse says Graincorp is a Buy

Shares in grains storage and transport company Graincorp Ltd (ASX: GNC) bounced higher on Monday despite brokers having mixed views on the stock after the company’s first-half result.

Credit Suisse is one broker that is positive. It upgraded the stock to “Outperform” from “Neutral” due to recent share price weakness going into the first-half result and Graincorp having a number of initiatives likely to deliver better profit and capital utilisation over the medium term.

The favourable view comes after Graincorp reported a large contraction in first-half earnings on Friday as ongoing dry weather conditions plagued crop production.

The company posted a 64% decline in underlying net profit after tax to $36 million and almost a 50% fall in underlying earnings before interest, tax, depreciation and amortisation to $119 million. Graincorp also cut its interim dividend from 15 cents to 8 cents per share.

The result came on the back of peer Incitec Pivot Ltd (ASX: IPL) posting a 1H2018 result that was below consensus forecasts, and fellow agricultural group, Nufarm Limited (ASX:NUF), downgrading earnings forecasts due to ongoing challenging weather conditions across Australia, Europe and the United States.

Credit Suisse says that whilst near-term catalysts for Graincorp are largely weather related, “medium-term prospects for a significantly more diversified grain marketing business, asset sale opportunities, an improving earnings picture in refined oils and further opportunities in craft malt and whisky remain supportive of valuation.”

The broker cut its target price to $8.80 from A$9.06 largely due to debt adjustments.

Other brokers are more cautious, however, with mixed views on the outlook for Graincorp in FY2019.

Macquarie says while Graincorp is continuing to push ahead with efficiency and diversification efforts and these are starting to see results, it believes the rest of these results are only likely to flow through in FY2019. The broker kept its “Neutral” rating on the stock.

Morgans, however, believes there is potential for another challenging year for Graincorp in FY2019.

“Given the challenging start to the next winter crop and the potential for it to be another below-average year, we are cautious on GNC in the short term,” it said in a report.

It also says while there is potential upside risk from the company realising value from the sales of its infrastructure assets, it questions whether the company would divest its liquid terminal assets in the near term given they generate stable earnings.

Morgans has a “Neutral” rating on Graincorp.

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