The Graincorp Ltd (ASX: GNC)share price is up today after broker Goldman Sachs upgraded the company to Buy. Here’s why.
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The Graincorp Ltd (ASX: GNC) share price opened 3% higher today after broker Goldman Sachs upgraded the company to a Buy rating. Goldman revised GrainCorp’s 12-month target share price to $5.34. This represents an 18% upside to the opening price of $4.40, and a 16% increase from the last target coverage. At the time of writing, the Graincorp share price is slightly higher, trading at 4.46, up 3.48%.
Why was GrainCorp upgraded?
Goldman said that GrainCorp provided “an attractive combination of near-term cyclical tailwinds and long-term structural benefits”.
A major reason for the broker upgrade was GrainCorp’s successful demerger with United Malt Group Ltd (ASX: UMG) back in March this year. Goldman said the demerger enabled the agribusiness to work through an estimated 63% of the $108 million targeted savings, thus reducing its net debt position.
In addition, GrainCorp’s FY21 results were set to benefit from a bumper 2020 winter crop harvested in October. Harvest expectations have been revised higher this year, with the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) most recently forecasting a 112% growth in crops year-on-year. The rainfall has also supported the business, aided by La Nina conditions.
Apart from the agricultural harvest business, Goldman also notes that GrainCorp stands to gain from its trading and processing businesses in FY21 due to the bumper crop.
Brief take on GrainCorp
GrainCorp is an agribusiness operating in more than 30 countries, with a focus on grains, oilseeds, pulses, edible oils and feeds.
The company has an integrated supply chain, starting from accumulation and storage which links up to road and rail freight options and eventually, port facilities. GrainCorp primarily operates across the segments of grains and oils. Malt was previously another key segment, however, this was spun-off into a new ASX-listed entity, United Malt Group Ltd, in March 2020.
GrainCorp share price performance in 2020
GrainCorp reported an improved financial performance following a year of significant transformation. The company reported underlying earnings before interest, tax, depreciation and amortisation (EBITDA) from continuing operations of $108 million. This compares to an underlying EBITDA loss of $107 million a year earlier. Net profit after tax (NPAT) came in at a loss of $16 million, but is still a major improvement on FY 2019’s $158 million loss.
The GrainCorp share price has had a bumper year, rising by more than 30% on a year-to-date basis. At the current price of $4.40, the company commands a market capitalisation of $986 million.
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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.