Finding effective investments in the agriculture sector remains as problematic as ever. Graincorp has reported its first half results, lifting its net profit after tax guidance range by $20m to $185-205m, although $17m is in significant items. The first half generates most of the earnings, so there is likely to be a good financial year. Analysts are forecasting another reasonable result for next financial year, although with lower earnings, subject to good weather conditions and good rainfall over the next few weeks. But there is a suspicion that the stock has peaked. It has doubled the performance of the All Ords since mid-2010 and the run may be slowing. Deutsche says this:
Strong grain volumes from successive bumper harvests have driven GNC’s earnings to record levels. The outlook appears positive, supported by high carry-over and forecasts for another robust crop. However, it is still early days and risks remain. With the stock trading moderately above our valuation, we retain our Hold. The solid dividend and corporate potential should continue to support the share price over the near-term, in our view
The stock has an earnings multiple below 10 and an estimated fully franked dividend yield of 6.2% for this financial year, anticipated to fall to 4.6% next financial year. Deutsche has a hold and a pessimistic price target of $8.60. It expects earnings per share to fall from 99c this financial year to 81c next financial year. The greatest risk, as ever, is exposure to cyclical and environmental factors:
Key downside risks are adverse weather impacts on grain volumes/quality, further malt margin pressure, competition, regulation and FX. Key upside risks are a larger than expected harvest, a malt recovery and corporate activity.