ASX stock of the day: This ASX food share surged 11% today following a jump in profitability

The Graincorp Ltd (ASX: GNC) share price was up as much as 10.9% today after the grain operator announced an after-tax half-year profit of $388 million. It marked a return to profitability for the company which recorded a net loss after tax of $59 million in H1FY19. 

The result reflects a significant repositioning of GrainCorp’s portfolio. During the half year ended 31 March, GrainCorp sold the Australian Bulk Liquid Terminals business and demerged United Malt Group Ltd (ASX: UMG). 

What does GrainCorp do?

GrainCorp is a food ingredients and agribusiness providing services to the grain industry. It is involved in storage and logistics, marketing and processing of grains and oilseeds. Activities are focused on 4 main grains – wheat, barley, canola, and sorghum. 

GrainCorp operates globally, managing grain pools and the import, export, and marketing of grain. It also processes and crushes oilseeds and provides edible oils. The malt business, which produced malt products and brewing inputs, was demerged in March 2020. 

Business performance 

In the half year ending 31 March 2020, each of GrainCorp’s business segments was up substantially on the prior corresponding period. The Agribusiness segment performed well, notwithstanding a third year of drought in Australia. 

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was $183 million in the March half and underlying net profit after tax (NPAT) was $55 million. Both were a substantial improvement on the prior period.

While COVID-19 presents challenges, food and agriculture are considered an essential service. GrainCorp plays a role in supporting the food and grain supply chain. Market conditions have improved considerably, with widespread rainfall across eastern Australia providing hope for a larger crop later this year. GrainCorp is well progressed in harvest readiness, including recruitment and training of seasonal workers. 

The company revised its capital structure during the half year to ensure minimal core debt. At the end of March, GrainCorp had zero core net debt. Its 10% minority stake in United Malt was valued at $112 million, providing additional financial flexibility. 

Outlook

GrainCorp is planning for higher grain exports in 2H20 with expectations of a higher crop in FY21. Favourable soil conditions across large parts of eastern Australia has supported widespread planting for the FY21 crop. Oilseed crush margins are expected to remain favourable in the second half due to prevailing canola and meal values. 

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Motley Fool contributor Kate O’Brien 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.

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