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Why Graincorp’s share price jumped when earnings crashed

is it a buy

A big crash in full-year earnings didn’t stop the Graincorp Ltd (ASX: GNC) share price from jumping higher this morning.

Shares in the grain handler added 1.2% to $7.52 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is struggling to hold at breakeven.

Other agriculture-related companies are turning in mixed performances as well. The Incitec Pivot Ltd (ASX: IPL) share price gained 0.9% to $3.52 while the Nufarm Limited (ASX: NUF) share price dropped 0.7% to $6.16 at the time of writing.

Big earnings loss due to drought

Coming back to Graincorp, management reported an underlying earnings before interest, tax, depreciation and amortisation of $69 million for the financial year ended September 30, 2019. This represents a 74% drop from FY18.

Its bottom line also fell off a cliff. Underlying net profit turned into a loss of $82 million in FY19 compared to a positive $71 million figure in the previous year.

It’s a good thing the news didn’t come as a surprise. Management provided guidance previously and that explains why the Graincorp share price is sitting at the bottom of its 52-week trading range.

Value investors harvesting stock

The lack of more bad news in today’s results is prompting bargain hunters to jump back into the stock after its 17% plunge since the start of this calendar year.

But that’s not the only thing that’s luring back buyers. Management said it was pushing ahead with the spin-off of its Malt business into a separate ASX-listed entity via a scheme of arrangement, which will be sent to shareholders in 2020.

Demergers are usually a good way to excite investors. We saw a strong share price response with Iluka Resources Limited (ASX: ILU) when it announced a similar move for its iron ore royalty business.

Another success story is the Wesfarmers Ltd (ASX: WES) and Coles Group Ltd (ASX: COL) separation.

Demerger to increase shareholder value

Graincorp’s Malt business is a bright spot for the group. Malt sales increased in the second half thanks to demand from craft beer and distilling customers.

“GrainCorp progressed its malt capacity expansion projects in Scotland, including an upgrade of Bairds Malt’s Arbroath facility and construction of a new malting plant at Inverness,” said the company in an ASX statement.

“The expansion will bring Bairds’ total annual capacity to over 300,000 tonnes.”

Companies usually divest troublesome parts of their business. Graincorp is doing it the other way around. Regardless, management believes this will be good for shareholders and will unlock significant value.

Graincorp gave a bullish outlook for the Malt division but noted that weather forecasts are predicting below average winter crop yields for 2020. Good thing its crop protection insurance will kick in.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Nufarm Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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