Every day the market throws you an opportunity, even during a bear market.
If you had purchased the ASX agricultural share GrainCorp Ltd (ASX: GNC) Friday 20 March, the week before its demerger, you would have paid $3.55.
The demerger was the separation of GrainCorp from its malt company United Malt Group Ltd (ASX: UMG). In addition, all qualifying share holders received one share in each company for each GrainCorp share they previously held.
By 25 March, the day after the demerger, the GrainCorp share price collapsed by 20% as the market revalued the remaining company. At the time of writing the total value of these 2 shares in the market is $8.23 – a rise in share price value of ~230% over a period of 2 weeks.
This was a great opportunity at the time, and remains a very good opportunity today.
Well managed agricultural stock
The GrainCorp company, post-demerger, continues to operate in the area of storage, marketing and trading of grains and the manufacture of edible oils. By revenue it is twice as large as United Malt Group in a year impacted by drought.
Like supermarkets and utilities, agricultural stocks are defensive. In epidemics like the coronavirus countries tend to hoard food. A trend we have already started to see. On Friday, wheat closed at AU$338, which is the highest price since November of 2019.
I like GrainCorp as an investment largely because of its defensive nature. However, I am also very impressed with the steps the management have been taking. The demerger and the sale of Australian Bulk Liquid Terminals have both released a lot of value for shareholders.
In June 2019, Graincorp announced a 10 year insurance agreement to reduce the risks associated with Australian agriculture. Because of this arrangement, a light harvest during this financial year due to drought has triggered a $57.9 million insurance payment.
A malt giant
The malt side of the business in FY19 was far more profitable.The newly demerged entity is now the world's fourth largest maltster. It has a strong collection of brands across Canada, the US, the UK and Australia. These brands have nearly 2 centuries of experience supplying some of the worlds largest brewers, distillers and food companies through 13 operating plants globally.
Foolish takeaway
The ASX is always humming with opportunities to profit if you search for them. In the case of this demerger, the result has been 2 profitable, defensive companies well positioned for growth in the post virus world.
