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He who is desperate will squeeze oil out of a grain of sand

14.05.2015

GrainCorp released their 2015 half year result today with a disappointing performance.

GrainCorp is Australia's largest agribusiness, operating a range of integrated businesses: Storage & Logistics, Marketing, Malt and Oils. Operations span across Australia, NZ, USA, Canada, Singapore, China, the UK and Europe, providing an increasingly important service across the food supply chain.

GrainCorp’s strategy is focused on 3 principal areas:
- Three core grains: Wheat, barley and canola; described as “drier climate” grains.
- Three integrated grain activities: Storage and logistics, marketing, and processing.
- Three operating geographies: Australasia, North America, and Europe. These regions service 50% of the global trade in GrainCorp’s core grains.

The 2015 commodity markets have not been kind to GrainCorp. The Group recorded a reduction in revenue from operations of 3.9%, followed by a drop in net profit before tax of 38%. GrainCorp experienced a fall in revenues in 3 of its 4 operating segments, with the only exception being Malt, experiencing an increase in sales of 5%. Lower commodity prices, lower harvest yields in Eastern Australia and increasing pressure from competition reducing margins resulted in poor performance.

Although GrainCorp released disappointing financial performance from operations, a $48m gain on exchange differences from translating foreign operations increased total comprehensive income by 60% on the prior corresponding period. However, the exchange difference will vary year-on-year and don’t represent operating performance.

In regards to financial position, cash and cash equivalents increased 10% to $227m and inventories increased 34% on reduced sales, reflecting either cooling market sentiment, or an increasing inability to market products to their core geographies. Revenues have dropped 3.9%, while trade and other receivables have increased 34%, leading to questions relating to GrainCorp’s ability to manage trade receivables.

Current borrowings increased 100%, along with non-current borrowing up 14.7%. Increased borrowings in an environment of decreasing revenues does raise questions on the ability to service these debt levels, however an interest coverage ratio of 16.8 provides sufficient comfort regarding GrainCorp’s ability to service debt. As at 31 March 2015, GrainCorp had unused credit facilities of $654m, and two of these facilities worth a combined $645m were refinanced after balance date on improved terms. Available credit facilities provide a healthy buffer against further downturns in the industry.

The Consolidated Statement of Cash Flows provides a greater level of clarity regarding GrainCorp’s performance. Receipts from Customers have declined 8.6%, whereas payments to suppliers and employees decreased 14%, reflecting an increasing reliance on trade and other payables to finance expenses. GrainCorp have maintained their EBITDA conversion to cash flows ratio, however much of their operations are being financed by inventory funding and short term borrowings.

In terms of investor returns, investors will be disappointed with a reduction in half year dividends by 38%, reflecting the downturn in operating performance. This disappointment has already been reflected in the price of GrainCorp, having dropped 3.17% as at 12.38pm 14/05/2015.

*Written by Tom McBride, Research Analyst at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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