ASX Stocks to Watch Graincorp (GNC)


Graincorp (GNC) | ASX Stocks to Watch | GNC Shares NewsGraincorp (GNC) provides handling, storage, marketing, and logistics to the Australian grain growing industry.

The company is also the primary bulk handling company on the east coast of Australia, servicing a growing number of domestic and export grain buyers.

GNC saw plenty of volatility over 2006-2008 owing to severe drought conditions prominent across key crop regions in Australia.

Natural disaster events such as floods and the recent earthquakes have also threatened operations.

Things have since turned around for GNC on the back of some strategic business moves.

Last year, AWB Ltd (AWB) and GNC considered a merger of their operations but this did not materialise as AWB’s board opted for a takeover offer from Agrium valuing it at $1.24 billion.

GNC finally managed to grow its business through the acquisition of the Kirin malt house in Perth from Kirin brewery.

Towards the end of last year, Graincorp reported a 27% rise in FY10 net profit to $80.2 million with the contribution of GNC’s new malt business was a key driver of the result.

Key strategic moves

Over the past three years, GNC has made a range of strategic improvements. Graincorp has diversified earnings and geography with the acquisition of an international malt business.

The company has entered the bulk wheat export market following the removal of the single desk monopoly.

The Australian grain industry has become more international following the move with future growth likely to be underpinned by favourable Asian demand.

GNC has secured its rail haulage capacity and aligned its operating structure with an improved customer focus.

The company is looking increasingly bullish following a recent solid trading update and strong demand and pricing for agricultural products.

FY results

GNC recorded a 27% rise in FY10 net profit to $80.2 million, with the result coming in comfortably within company guidance of $75 million to $90 million but at the lower end.

This result was built on a 20% on year jump in revenue to $2 billion.

The contribution of GNC’s new malt business was a key driver of the result, although this was offset by a slump in trading revenue due to a decrease in grain prices.

GNC was cautious about its outlook and refused to provide FY11 guidance, saying instead there was continued uncertainty on grain volume and quality, as well as harvest timing.

GNC declared a final dividend of 10 cents per share, whilst its share price sank 9.6% on its uncertain outlook.

Looking ahead

GNC is poised to grow as an integrated, international and competitive agribusiness.

Australia supplies 15% (approximately 140 mmt) of globally traded wheat and barley.

With the world population set to grow and with 40% of this growth in countries where Australia has a grain supply freight and quality advantage, we feel GNC is in a prime position.

Wheat and barley import demand is forecast to grow by 2.5% per annum over the next 8 years.

Graincorp will continue to look at organic growth and accretive acquisitions.

A higher Aussie dollar remains a threat for GNC’s huge export business. Any pullback in the Aussie dollar would give GNC further upside.

GNC has reduced its core debt gearing to less than 25% in recent years. This low debt structure provides GNC with a solid platform for growth, making it one of the stocks to watch.

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