GrainCorp (ASX:GNC)

Mark Palmquist
CEO
Market Cap (AUD): 1.78B
Sector: Consumer Staples
Last Trade (AUD): 7.815 +0.04 (+0.45%)
Tab Bar

1. About

GrainCorp is a leading international food ingredient and agribusiness company with an integrated business model across three main grain activities: supply chain, origination, and processing.

GrainCorp has operations in Australia, New Zealand, Asia, North America, Europe, and the United Kingdom. These markets collectively represent over 50% of the international export trade in wheat, barley, and canola.

GrainCorp has three reporting segments

  • GrainCorp Grains
  • GrainCorp Malt
  • GrainCorp Oils

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($M)

% of Total Revenue

% of Profit (before Tax)

Profit drivers[2]

Grains

$2,241.9

52.7%

(9.8%)

Grains contributed $68 M EBITDA, a 67% reduction on last year. This primarily reflects the sharp drop in grain production in eastern Australia to 16.6mmt (FY17: 28.2mmt)2 and lower grain exports. The result was also negatively impacted by GrainCorp stake-or-pay’ rail commitments, due to the lower volumes

Malt

$1,152.4

27.1%

156.0%

Malt’s $170 M EBITDA was an 8% increase on last year, with a solid second half that included a full contribution from the expanded malting capacity in Pocatello, Idaho. The business continued to operate at high utilisation, servicing a broad mix of brewing and distilling customers globally

Oil

$969.1

22.8%

37.0%

Oils delivered $61 M EBITDA, a 5% increase on last year. Liquid Terminals and Feeds performed strongly, however Oilseeds was down year-on year due to reduced Australian canola supply and quality issues, both of which impacted the crush margin. The Foods business made steady progress with improved operational efficiencies at West Footscray

Corporate

N/A

N/A

(83.2%)

N/A

Eliminations

($110.3)

(2.6%)

N/A

N/A

3. Strategy

 

Key strategies include:[3]

 

  • The Company operates in a global grain market that offers considerable growth prospects in the demand for grain and processed grains such as malt and edible oils
  • Population growth and rising affluence are projected to drive large increases in both global grain demand and global grain trade
  • Company’s strategy is to apply its comparative advantages in the supply of grain, malt and edible oils to participate in this growth opportunity, serving customers in Australia and internationally
  • In FY19, the Company expects a considerable decline in grain production in eastern Australia due to the severe drought that has affected much of the region. It is anticipated that production will again be skewed to Victoria and southern New South Wales, with deficits in northern New South Wales and Queensland
  • In response to the outlook, the Company is adapting GrainCorp’s country network to better match the size and location of the crop and keeping a strong focus on cost control, asset utilisation and capex allocation
  • With expectations of minimal exportable surplus in eastern Australia, the Company anticipates grain to continue flowing from Western Australia and South Australia via vessel to ports in eastern Australia. The Company has adapted several GrainCorp ports to handle the reverse supply chain and the in-loading requirements

4. Markets

 

The Company operates in the following industries:[4]

 

Industry  (Australia)

Industry Revenue

Growth Rate

Grain Growing

$11 billion (2018)

3.5% (annual 13-18)

Cereal Grain Wholesaling

$21 billion (2018

2.5% (annual 13-18)

Cooking Oil and Margarine Manufacturing

$2 billion (2018)

6.8% (annual 14-19)

Grain Storage

$3 billion (2017)

1.3% (annual 13-18)

5. Competition

 

Major competitors include:[5]

 

  • Archer-Daniels-Midland Company
  • Cargill, Incorporated

6. History

 

1916[6]   

The Company was established as the Grain Elevators Board

 

1922   

Australia's first bulk grain terminal and was complimented by the Company’s first elevator built in Peak Hill

 

1992   

The Company was named GrainCorp

 

1996   

The Marketing business was established and GrainCorp became the first bulk handler to trade grain within Australia, moving away from the price monopoly of government entities

 

1998   

The Company listed on the Australian Stock Exchange

 

2000   

Vicgrain (Victoria) was acquired by the Company. The Company entered a joint venture with US agribusiness Cargill to purchase Allied Mills, expanded its presence along the grain chain, including production and processing

 

2002   

Grainco (Queensland) was acquired by the Company

 

2007   

Hunter Grain was acquired by the Company

 

2008   

The Australian wheat market was deregulated and the single wheat desk was removed. The Company traded commodities in its own right, with marketing offices in Australia, Europe, Singapore, China, the UK and North America

 

2009   

Strategic acquisition of United Malt Holdings to formed GrainCorp Malt

 

2011   

Acquisition of Germany’s Schill Malz. A malt plant was also acquired in Western Australia

 

2015   

GrainCorp expands grain origination footprint in Canada

 

2016   

GrainCorp joined Australian Grains Champion consortium

 

2017   

GrainCorp confirmed the completion of the sale of its investment in Allied Mills Australia Pty Ltd to funds advised by Pacific Equity Partners “PEP” following regulatory approvals

 

2018   

GrainCorp expands Scottish malting capacity to support distilling growth

7. Team

 

Board and Executives[7]

 

Graham J Bradley AM – Chairman and Non-Executive Director

Mark L Palmquist – Managing Director and Chief Executive Officer

Rebecca P Dee-Bradbury – Non-Executive Director

Barbara J Gibson – Non-Executive Director

Peter J Housden – Non-Executive Director

Daniel J Mangelsdorf – Non-Executive Director

Donald G McGauchie AO – Non-Executive Director

Peter I Richards – Non-Executive Director

Simon L Tregoning – Non-Executive Director

Andrew Baker – Chief Information Officer

Alistair Bell – Group Chief Financial Officer

Phil Caris – Group General Manager, Human Resources and SHE

Greg Friberg – President and CEO, GrainCorp Malt

Marcus Kennedy – Chief Development Officer

Klaus Pamminger – Group General Manager, Grains

Sam Tainsh – Group General Manager, GrainCorp Oils

Annerly Squires – Joint Company Secretary[8]

Gregory Greer – Company Secretary[9]

Murray Floyd – Acting Group General Counsel[10]


read more

8. Financials

 

2019 Half Year Results Presentation

 

Financial Year 2017/2018 (ended 30 September 2018):[11]

 

Divisions

Revenue ($M)

% Change

Profit (before Tax) ($M)

% Change

Grains

$2,241.9

(14.5%)

($7.2)

(105.3%)

Malt

$1,152.4

4.2%

$114.8

24.0%

Oil

$969.1

2.5%

$27.2

40.9%

Corporate

N/A

N/A

($61.2)

(1.9%)

Eliminations

($110.3)

(13.5%)

N/A

N/A

Total

$4,253.1

(7.1%)

$73.6

(60.2%)

9. Risk

 

Major risks include:[12]

 

Weather Conditions - Weather conditions can cause variability in grain production, which may impact GrainCorp’s operations results in several ways; including variability in the volume of grain that GrainCorp stores, handles, transports, trades, exports and uses in its business, as well as by affecting the credit worthiness of agricultural producers who transact with GrainCorp. An integral aspect of GrainCorp’s strategy has been to reduce the impact on earnings of cyclical weather conditions, especially the impacts of drought. Over the past eight years the Company has been managing this exposure, diversifying its operations into downstream value adding businesses in Australia and overseas. During FY18, GrainCorp commissioned expert environmental research to better assess the potential long-term impact of predicted climate change on grain production in 23 key wheat cropping districts in eastern Australia. Further information on the climate change impact assessment can be found in GrainCorp’s 2018 Sustainability Report, available on the Company’s website.  

 

Other External Factors - GrainCorp’s business and financial performance are subject to external factors, including farmer sowing decisions, levels of on-farm storage, domestic and international government farm support programs and policies, demand for biofuels, commodity price volatility, the outbreak of plant disease or pest and the occurrence of and resistance of pests to pesticides used to protect grain in storage.

 

Regulation - GrainCorp’s business is regulated by a range of laws and regulations in countries where GrainCorp operates. GrainCorp may be subject to costs, investigations, penalties, liabilities, loss of reputation and other adverse effects as a result of failure to comply with these laws and regulations. Further, the introduction of new laws and regulations could materially adversely impact GrainCorp’s business and financial performance, for example by necessitating increased levels of expenditure on compliance, monitoring, controls, access regimes and arrangements, and land use restrictions.

 

Transportation - GrainCorp’s operations rely on rail and road transportation to move grain from farms into country storage sites, and from these sites to port terminals and domestic consumers. A disruption or delay in rail transportation service provision, for instance as a result of temporary or permanent rail track closures, may adversely impact GrainCorp’s operations and operating results. GrainCorp also charters vessels in and to international jurisdictions to transport products to consumers. A disruption in international shipping activities, for instance ship diversion, port blockages or acts of piracy, may adversely impact GrainCorp.

 

Operational Risks - GrainCorp’s business is subject to various operational risks, including claims and disputes in relation to grain or finished product inventory, machinery breakdown, supply issues, loss of long-term agreements for supply or for premises, regulatory requirements, workplace disputes and impacts of environmental obligations

 

Market Demand - During times of reduced market demand for grain, GrainCorp may suspend or reduce operations and production at some of its facilities. The extent to which GrainCorp efficiently manages available capacity at its facilities will affect its profitability

 

Commodity Prices - GrainCorp’s business may be adversely affected by changes in the price of commodities, additional raw materials, the cost of energy and other utility costs caused by market fluctuations beyond GrainCorp’s control, which have in the past, and could in the future, adversely affect margins.

 

Hedging Risk - GrainCorp engages in hedging transactions to manage risks associated with fluctuations in the price of commodities, transportation costs, energy and utility prices, interest rates and foreign currency exchange rates. However, GrainCorp’s hedging strategies may not be successful in minimising its exposure to these fluctuations. Further, it is possible that GrainCorp’s risk management policies may not successfully prevent GrainCorp’s traders from entering into unauthorised transactions that have the potential to alter or impair GrainCorp’s financial position.

 

Food and Feed Industry Risks - GrainCorp is subject to food and stockfeed industry risks such as spoilage, contamination, fumigation or treatment applications which do not meet destination requirements, incorrect grade classification, tampering or other adulteration of products, product recalls, government regulation, destination or industry standards, shifting customer and consumer preferences and concerns and potential product liability claims. These matters could adversely affect GrainCorp’s business and operating results.

 

Capital Requirements - GrainCorp requires significant amounts of capital to operate its business and fund capital expenditure. If GrainCorp is unable to generate sufficient cash flows or raise sufficient external financing on acceptable terms to fund these activities, GrainCorp may be forced to limit its operations and growth plans, which may adversely impact efficiency, productivity, competitiveness and financial results.

 

Debt Obligations - GrainCorp’s debt obligations are subject to certain operating, financial and other covenants. If GrainCorp fails to meet these covenants, GrainCorp may be forced to repay those debt obligations on demand. GrainCorp may also not be able to put in place new debt facilities on acceptable terms by the time existing debt facilities expire.

 

Global and Regional Economic Conditions - The level of demand for GrainCorp’s services and products is affected by global and regional demographic and macroeconomic factors, including population growth rates and changes in standards of living. A significant downturn in global economic growth, or recessionary conditions in major geographic regions, may lead to a change in consumer preferences impacting demand for grain and agricultural commodities, such as malt and flour, which could have a materially adverse effect on GrainCorp’s business and financial performance.

 

Customers and Suppliers - Weak global economic conditions and tight credit markets may adversely affect the financial viability of some of GrainCorp’s customers, suppliers and other counterparties, which in turn may negatively impact GrainCorp’s operations and financial performance.

 

Cyber security - GrainCorp may be adversely affected by cyber security risk due to the increasing reliance on information technology systems and increased frequency and magnitude of global cyber events

 

General Risks

Economic risks - General economic conditions, fluctuations in interest and inflation rates, commodity prices, currency exchange rates, energy costs, changes in governments, changes in fiscal, monetary and regulatory policies, the development of new technologies and other changes to general market conditions may have an adverse effect on GrainCorp, its future business activities and the value of GrainCorp shares.

Market conditions - Share market conditions may affect the value of shares regardless of GrainCorp’s financial or operating performance. Share market conditions can be unpredictable and are affected by many factors including changes in investor sentiment toward particular market sectors (in particular agriculture and food supply) and the domestic and international economic outlook.

Significant events - Significant events may occur in Australia or internationally that could impact the market for commodities relevant to GrainCorp, GrainCorp’s operations, the price of shares and the economy generally. These events include war, terrorism, civil disturbance, political actions and natural events such as earthquakes and floods.

 

Financial Risk

Market risk

The Group’s activities expose it to the financial risks of changes in (i) commodity prices, (ii) foreign currency and (iii) interest rates.

 

Commodity price risk – commodity trading

Commodity price risk arises due to grain and edible oil price fluctuations impacting on the value of commodity forward purchase and sales contracts written by the Group as part of its grain, meal and edible oil marketing activities. The Group’s policy is to lock in favourable margins between the purchase and sale price of commodities, but differences in the timing of entering into these contracts create an exposure to commodity price risk. To manage exposure to this risk, the Group enters into various exchange traded commodity derivative contracts (futures and options) as well as OTC contracts with terms between two and 24 months. These contracts are predominantly in Australia, New Zealand, US, Canada and Europe based financial markets and denominated in the currencies of those jurisdictions.

 

Commodity price risk – malt and oils production

The Group enters into forward physical purchase and sales contracts along with commodity derivative contracts to manage the underlying price risks in the purchase of raw materials for malt and oils production and the subsequent sale of malt and oils products. These contracts are entered into and continue to be held for the purpose of delivery of raw materials and subsequent sale of processed malt and oils and are therefore classified as non-derivative and not fair valued.  

 

Foreign Currency Risk

The Group has exposure to movement in exchange rates through:

  • Commodity futures denominated in foreign currency;
  • Export contracts for the sale of grain, edible oils and meal denominated in foreign currency
  • Sale or purchase of malt, edible oils and raw materials in foreign currency
  • Translation of net investments in foreign subsidiaries denominated in foreign currencies.

To manage exposure to this risk, the Group enters into forward exchange contracts, foreign currency options and swap contracts, with the contracted time to mature when the relevant underlying contracts expire.

 

Interest Rate Risk

The Group has exposure to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by maintaining between 40% and 75% of long-term borrowings at fixed rates through the use of interest rate swap contracts. Under interest rate swap contracts, the Group is entitled to receive interest at variable rates and is obliged to pay interest at fixed rates. The contracts require settlement of net interest receivable or payable at each reset period. The settlement dates coincide with the dates on which interest is payable on the underlying debt. At 30 September 2018, after taking into account the effect of interest rate swap contracts, approximately 47% ($355 million) of the Group's long-term borrowings are at a fixed rate of interest (2017: 47%, $348 million). The Group continuously monitors its interest rate exposure with consideration given to cash flows impacting on rollovers and repayments of debt, alternative hedging instruments and the mix of fixed and variable interest rates.

           

Liquidity Risk  

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, finance leases and committed available credit facilities. The Group manages liquidity risk by regularly monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. At balance date, the Group had approximately $677.4million (2017: $455.4 million) of unused credit facilities available for immediate use.

 

Credit risk

Credit risk is the risk that a counterparty will default on its contractual obligations, resulting in financial loss to the Group. The Group is exposed to credit risk from its operating activities and financing activities.

 

Trade receivables

The Group minimises credit risk associated with trade and other receivables by performing a credit assessment for all customers that wish to trade on credit terms. Credit limits are determined for each individual customer based on their credit assessment. These limits are approved under the credit policy that is approved by the Board. At 30 September, 95% (2017: 96%) of trade receivables are due within 30 days and the Group does not have any significant credit risk exposure to a single customer or group of customers.

 

Financial instruments and cash deposits

To minimise the credit exposure to financial institutions that are counterparties to derivative contracts and cash, the Group has a panel of authorised counterparties who are principally large banks and recognised financial intermediaries with acceptable credit ratings determined by a rating agency. The Group’s net exposure and credit assessment of its counterparties are continuously monitored to ensure any risk is minimised. The Group may also be subject to credit risk for transactions that are not included in the consolidated statement of financial position, such as when a guarantee is provided for another party. The Group’s maximum exposure for credit risk is the carrying amount of all trade and other receivables, receivables from joint ventures, derivative asset balances, margin deposits and cash assets as set out in the consolidated statement of financial position.

References

  1. ^ Annual Report 2018, P 52-53
    https://www.listcorp.com/asx/gnc/graincorp/news/appendix-4e-and-annual-report-2020759.html
  2. ^ Annual Report 2018, P. 07
    https://www.listcorp.com/asx/gnc/graincorp/news/appendix-4e-and-annual-report-2020759.html
  3. ^ Annual Report 2018, P. 08, 18
    https://www.listcorp.com/asx/gnc/graincorp/news/appendix-4e-and-annual-report-2020759.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=13
    http://www.ibisworld.com.au/industry/default.aspx?indid=341
    http://www.ibisworld.com.au/industry/default.aspx?indid=100
    http://www.ibisworld.com.au/industry/default.aspx?indid=497
  5. ^ http://www.hoovers.com/company-information/cs/company-profile.graincorp_limited.dc8446c40b428160.html
  6. ^ http://www.graincorp.com.au/about-graincorp/company/our-history
    https://www.listcorp.com/asx/gnc/graincorp/news/graincorp-expands-grain-origination-footprint-in-canada-795044.html
    https://www.listcorp.com/asx/gnc/graincorp/news/graincorp-joins-australian-grains-champion-consortium-871927.html
    https://www.listcorp.com/asx/gnc/graincorp/news/allied-mills-sale-completes-1563111.html
    https://www.listcorp.com/asx/gnc/graincorp/news/graincorp-expands-scottish-malting-capacity-1998022.html
  7. ^ http://www.graincorp.com.au/about-graincorp/company/board-and-executives
  8. ^ https://www.listcorp.com/asx/gnc/graincorp/news/joint-company-secretary-appointment-2038050.html
  9. ^ https://www.listcorp.com/asx/gnc/graincorp/news/resignation-of-joint-company-secretary-2025047.html
  10. ^ https://www.listcorp.com/asx/gnc/graincorp/news/resignation-of-joint-company-secretary-2025047.html
  11. ^ Annual Report 2018, P 52-53
    https://www.listcorp.com/asx/gnc/graincorp/news/appendix-4e-and-annual-report-2020759.html
  12. ^ Annual Report 2018, P. 26-27, 66-70
    https://www.listcorp.com/asx/gnc/graincorp/news/appendix-4e-and-annual-report-2020759.html