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Graincorp share price higher on demerger announcement

The market may have tumbled lower on Thursday, but the same cannot be said for the Graincorp Ltd (ASX: GNC) share price.

In morning trade the grain exporter’s shares were up as much as 5.5% to $9.80 at one stage. At the time of writing they are 4% higher at $9.68.

Why is the GrainCorp share price on the rise?

This morning the company announced its intention to demerge its global malting business, subject to shareholder and other approvals.

According to the release, doing so would result in two independent ASX-listed companies and unlock significant value for shareholders.

One company would be MaltCo, a global malting and craft brewing distribution business.

MaltCo will be the world’s fourth largest independent maltster with malting houses in the United States, Canada, Australia, and the United Kingdom. It also operates Country Malt Group, a leading craft malt distribution business in North America.

The business benefits from high quality, low operating cost processing assets strategically located in premium barley growing regions. These assets have benefited from significant historical investment and are expected to require stay in business capital expenditure of $15-20 million per annum. In FY 2018 the business generated EBITDA of $170 million.

It is expected that MaltCo will target a dividend payout ratio of between 60% – 80% of underlying NPAT.

The other company would be New GrainCorp, a domestic and international grain handling, storage, trading and processing business focused on grains, oilseeds, pulses, edible oils and feeds.

GrainCorp’s chairman, Graham Bradley, explained: “The Board believes that the demerger would unlock significant value for shareholders by establishing two unique and high quality ASX-listed agribusinesses with focussed management teams able to pursue independent strategies and growth opportunities.”

The company’s CEO, Mark Palmquist, was equally optimistic on the demerger.

He said: “Our Portfolio Review made clear that these businesses have different characteristics and would benefit from operating separately. A demerger would provide both MaltCo and New GrainCorp with increased flexibility to implement independent operating strategies and capital structures and allow them to attract investors with different investment priorities.”

Should you invest?

I think this is a good decision by management and I’m not surprised to see its shares push higher today.

If the demerger does go ahead, I would certainly be interested in investing in MaltCo at the right price.

Until then, investors might want to consider sector peers Costa Group Holdings Ltd (ASX: CGC) and Rural Funds Group (ASX: RFF).

Alternatively, check out these top dividend shares which have been rated as buys.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and RURALFUNDS STAPLED. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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