GrainCorp growth strategy on track

In late March, I touched on GrainCorp and its purchase of Kirin Australia as part of a value-adding strategy for the malt arm of its business.

Last Thursday, GrainCorp confirmed its growth strategy is on track, reporting an $87.7 million net profit for the six months ending March 2011.

This is a rise of 66 per cent from the previous corresponding period.

The improvement in first-half earnings reflected a significant increase in contributions from the ports and grain marketing businesses, which was slightly offset by reduced contributions from the malt and Allied Mills businesses.

First half results also included a $40.4 million mark-to-market gain on derivatives, versus a gain of $4.7 million in the previous corresponding period.

GrainCorp chief financial officer Alistair Bell was quick to point out that this gain related to the grain marketing side of the business and reflected hedging positions that GrainCorp has around its commodity inventory, rather than speculative trading within the grain market.

This is backed up with more than 75 per cent of GrainCorp’s executed sales volume in the first quarter represented by tonnes delivered to the end user.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) estimates 2010/2011 eastern Australian grain production will be above 24 million tonnes, up 60 per cent from the previous year.

This is good news for volume-based businesses such as GrainCorp and has filtered through into the underlying numbers, with GrainCorp upgrading its expected grain country receivals to 15 million tonnes, up from our previous guidance of 14.5 million tonnes and well above the 10 to 13 million tonne guidance at the start of the year.

These upgrades have flowed down the line, with export volume guidance, a key driver of earnings for GrainCorp, upgraded slightly to seven to eight million tonnes from 6.5 to 7.5 million tonnes.

In terms of the bottom line, GrainCorp has increased its EBITDA guidance for the full year to September 2011 to $310 million to $340 million, up from $275 million to $310 million.

These upgrades pushed the GrainCorp share price up 8 per cent on the day to a peak of $8.60/share, before consolidating to close at $8.25 on Monday.

For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au