Tuesday, January 16, 2007

Graincorp has risks and opportunities

Graincorp Limited (ASX:GNC) believes they have excellent opportunities ahead. One of these opportunities is the deregulation of barley in South Australia. Graincorp is also confident it will soon be issued with an export licence for wheat, after "single desk" operator AWB lost its monopoly due to a bribery scandal. In the first round of new export permits being awarded by the Australian Government, Graincorp had lost out to Wheat Australia and CBH. While the drought conditions will cause a net loss for 2006-07 of $A30m, the business is forecast to achieve a return on equity of 10% by 2009.

I can see a lot of things which could send this company up much higher but I also see some major risks in the company. For instance they need to create links to suppliers in South Australia, they need to get some experience in Wheat export. There is a reason they were not chosen first round and I haven't investigated them but I am sure they are going to have good competition from Wheat Austrlaia and CBH. Also they are expecting the drought to end this year but what happens if it does not break.

Too many risks for this company which is trading at 17 times estimated earnings for 2008 and by any standards these estimates are based on the drought breaking and several of these opportunities paying off. One to stay clear of at this stage unless there is a dramatic fall.

Good Luck Investing.

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