PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 10:53 UK, 25th Feb 2014, by Agrimoney.com
GrainCorp profits may halve as Aussie drought hits

GrainCorp braced investors for a potential halving in profits, and warned it was to close some grain receival sites, blaming a dent to its crop volumes from drought, and "increasingly intense competition".

Shares in the grain handler fell to their lowest in nearly two years after it warned that its earnings for the year to September would fall to Aus$80m-100m, from Aus$175m last year, hurt by "poor conditions" for farmers in its eastern Australian stronghold.

The group forecast a fall of one-quarter to about 7.7m tonnes in its crop receivals for the financial year, thanks to the dryness which constrained output of winter grains such as wheat, and is now hitting prospects for the summer sorghum harvest.

"Drought conditions in Queensland and northern New South Wales [have] severely impacted sorghum crop planting and possible yields," the group told shareholders.

While Australia's overall wheat harvest turned out to the second highest ever, at 27.0m tonnes according to the Abares crop bureau, that reflected bumper crops in South and Western Australia, with output falling in the east.

Abares foresees sorghum, grown exclusively within GrainCorp's eastern stamping ground, at less than 1.3m tonnes, down 36% year on year.

Lower export volumes

GrainCorp said that as an extra dent to its profits, export volumes may also halve, to 4.0m-5.0m tonnes compared with 8.3m tonnes last year, "impacted by the lower-than-average eastern Australian crop", with trade focused more on South and Western Australia.

GrainCorp forecasts for 2014 financial year and (last year's result)

Ebitda: Aus$275m-315m, (Aus$395m)

Underlying after-tax earnings: Aus$80m-100m, (Aus$175m)

Crop receivals: about 7.7m tonnes, (10.4m tonnes)

Grain exports: 4.0m-5.0m tonnes, (8.3m tonnes)

Carry-out: 1.5m-2.0m tonnes, (2.3m tonnes)

The outlook was characterised by "strong domestic demand with minimal exports in northern regions contrasting to likely exportable surplus in southern regions".

Furthermore, the group faced "increasingly intense competition, both up-country and at the ports" for grain handling and storage.

The analysis contrasts with the Australian government's view of a need to enhance industry competition, one of the reasons given for its rejection four months ago of Archer Daniels Midlands' attempt to takeover GrainCorp.

'Fiercely competitive'

"That decision is made and we cannot afford to dwell on it," Don Taylor, the GrainCorp chairman, said.

However, he added that "despite what you may have read or heard during the ADM transaction, I can assure you that our storage and logistics business is not a monopoly.  In fact, the environment is fiercely competitive.

"Up-country we have to fight hard for every single tonne of grain and the competitive pressures are growing significantly."

"We have a wide variety of competitors, many of them large multinational grain companies with financial backing and the strategic intention to compete aggressively."

Earlier this month, Japanese conglomerate Sumitomo Corp took full control of Victoria-based cereals handler Emerald Grain.

Site closures

The group added that to boost profitability it was to shake-up its grain receivals network, meaning closure of some sites, of which two-thirds tale in some 90% of the group's volumes.

"Growers are already clearly indicating which sites they prefer and this means there is a growing number of sites that receive less and less grain each harvest," Mr Taylor said.

The reassessment "will involve some sites growing, some sites shifting focus, and some unviable sites closing".

However, the group, against the performance of growing competition in grains handling, highlighted the "solid" performance of the malt, milling and oilseeds sectors it has diversified into which, with marketing, now account for nearly 60% of earnings, up from 25% four years ago.

Market reaction

The immediate market reaction was to send GrainCorp shares down 3.7% to Aus$7.52, their lowest since March 2012, months before ADM unveiled its bid interest.

Analysts had been expecting GrainCorp to unveil earnings of Aus$123m this year, well above the range the group guided to on Tuesday.

Nonetheless, the shares recovered to close at Aus$7.77, down 0.5% on the day.

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