By Jared Lynch
China's tightening of infant formula regulations has hit Australia's biggest agribusiness GrainCorp.
The company's net profit plunged 32.5 per cent in the six months to March 31 amid a "subdued market" and dry weather. Chief executive Mark Palmquist also cited a delay in infant formula sales, which stemmed from regulatory changes in China.
GrainCorp CEO Mark Palmquist says the market has been "subdued".Credit: Arsineh Houspian
"One of the growing, high margin businesses for us is in that cocktail of oils that we blend that goes into infant formula," Mr Palmquist said.
"Our customers' forecasts have been delayed and a lot of that is coming from China, which is obviously a large consumer of infant formula in our region."
In January Chinese authorities slashed the number of infant formula products a company could sell in the country as part of new food safety laws.
Mr Palmquist said this had caused some uncertainty for its customers, which produce infant formula across Australia and New Zealand, with some having to re-register their products.
"That's had an impact. But it's a delayed timing issue more than anything," adding once GrainCorp's customers completed the new regulatory process orders would rebound.
Mixed results
Oils revenue – which fell 6.6 per cent to $440 million – represented about one-fifth of GrainCorp's overall sales, which firmed 4.8 per cent to $2.07 billion.
The company's malt business was its biggest earner, generating earnings before interest, tax, depreciation and amortisation of $76 million – a 10 per cent lift.
Strong demand from North American craft beer and global distilling markets helped fuel the increase.
But the company still faced challenges in its home market. Overall net profit fell to $20.4 million in the six months to March 31, compared with $30.2 million in the same period the year before.
Morgans analyst Belinda Moore said the first half of the year had been the toughest GrainCorp had experienced in "many years".
She said the company had well below average grain in storage, or carry-in, with 1.6 million tonnes versus 1.9 million tonnes a year earlier, and a lower exportable surplus – "both of which are high margin work" for Graincorp.
"Intense competition for grain in eastern Australia and a larger world grain crop and cheap ocean freight is reducing Australia's export competitiveness and delayed GNC's export program," Ms Moore said.
"The short-term outlook for GNC is tough. While the best time to buy GNC is during a poor season in anticipation of improved returns for when an 'average season' returns, until we gain greater clarity on the new season, we think it is too early to build a position."
Ms Moore said rainfall in past weeks across main grain areas was promising after a drier-than-expected autumn. But she said it was still early days in the season.
The company's shares shed 2 per cent to $7.83. This compared with the broader market gaining 0.6 per cent.
Takeover plans
Mr Palmquist insisted a plan from a consortium, which GrainCorp is apart of, to takeover Australia's biggest wheat exporter, CBH Group, was still "alive".
This was despite CBH rejecting the proposal, which valued the Western Australian co-operative at about $3 billion, earlier this month.
"We certainly don't think it [the deal] is dead," Mr Palmquist said. "We are still working through the process. We think it makes good sense.
"Anything that goes on in Australian agriculture that we think has the potential to be transformational, we definitely believe we should try to participate in that.
"The issue with [the CBH proposal] … is it's really for the WA growers to make that decision. We think it's important they get an opportunity to do that … and get a chance to have a vote."
GrainCorp maintained an interim dividend on July 1 of 7.5¢, which represents a payout ratio of 53 per cent of net profit.