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Why the best performing ASX stock might have more room to run higher

Race

The Graincorp Ltd (ASX: GNC) share price is rallying for the second day and is topping the charts!

Shares in the grain handler jumped 8.5% to $3.98 in morning trade. This makes it the best performer on the S&P/ASX 200 Index (Index:^AXJO) with gold miner Silver Lake Resources Limited. (ASX: SLR) a distant second.

Graincorp’s gains comes on top of yesterday’s near 12% run after it posted a better than expected first half profit result.

The brightening outlook for agribusinesses is also giving Elders Ltd (ASX: ELD) a lift with the stock jumping 5% to $9.52 at the time of writing. Elders is expected to report its earnings on Monday.

The question facing investors is whether it’s too late to buy Graincorp shares.

Bumper growth

The good news is there is quite a bit of space for the stock to climb before hitting fair value, according to the analysts at Macquarie Group Ltd (ASX: MQG).

Graincorp’s interim net profit from continuing operations of $27 million is well ahead of Macquarie’s estimates of $18 million.

What’s more, all the group’s divisions, including its processing business, were performing better than the broker expected.

Firing on all cylinders

“Processing reported EBITDA of $23m, stronger than our $11m forecast,” said Macquarie.

“Oilseed crush margins have recovered strongly due to increased ECA canola supply and stronger oil and meal demand/pricing.”

The good times may continue to roll on into the second half, thanks in no small part to the recent wet weather along the east coast.

Trade war misses mark

Even the diplomatic spat between China and Australia doesn’t faze Macquarie. China threatened to buy fewer Australian exports in retaliation to Prime Minister Scott Morrison’s call for an independent investigation on the origins of COVID-19.

Tensions escalated when China formally threatened to slap a 80% tariff on Australian barley and suspended the import licenses of four of our abattoirs.

But Graincorp may not be as impacted by the potential barley tariff as some investors might have thought.

This is because 88% of Aussie barley exports come from Western Australia and Graincorp is an east coast centric business, explained Macquarie.

Clearer skies ahead

“GNC is planning for higher grain exports in 2H20 (exports generally higher margin vs domestic),” said the broker.

“Oilseed crush margins are expected to remain favourable in the second half due to prevailing canola oil and meal values.

“Favourable soil moisture levels across large parts of eastern Australia have supported widespread planting for the FY21 crop.”

What’s more, Graincorp is tipped to restart paying dividends in FY21 after a three-year break.

Macquarie is urging investors to buy the stock and its price target is set at $4.79 a share. This leaves Graincorp with a 23% potential upside over the next 12 months, if forecast dividends are included.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Elders 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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