Investing.com - After another successful harvest season, Graincorp Ltd (ASX:GNC) CEO Robert Spurway is sitting on a sizable cash reserve and is considering an exploration into the biofuels sector. However, this strategic move might not be in line with what investors are hoping for.
Spurway referred to the company's recent performance as an "outstanding result," a sentiment echoed by investors and analysts. The grain handling company exceeded expectations in terms of revenue, EBITDA, earnings per share, and dividends, largely due to a third consecutive bumper crop. This led to a 6% increase in GrainCorp's shares during Thursday's trading.
The highlight was GrainCorp's $475 million corporate cash reserve, bolstered by strong cash earnings and the sale of its former subsidiary, United Malt Group. How Spurway chooses to utilise this cash will shape GrainCorp's narrative for FY24 and may offer insights for other CEOs and boards on managing the delicate balance between investment and capital returns.
Investors generally favor substantial capital returns, such as buybacks or special dividends. However, Spurway appears to be leaning towards investing in growth, specifically in the biofuels sector. This could diversify earnings and increase existing crushing volume and earnings.
Spurway is particularly interested in a new oilseed crushing plant in Western Australia, which could use surplus canola seeds from local farmers to produce biofuels. This venture, which could cost several hundred million dollars, has piqued the interest of fund managers.
GrainCorp's recent performance, characterized by three years of good harvests, the United Malt sale, and disciplined investment, has transformed the company into a more reliable investment. This was evidenced by GrainCorp reporting an 18.6% return on invested capital in the year to September 30.
GrainCorp rewarded its investors with 54¢ per share in dividends and special dividends for FY23, exceeding market expectations. Additionally, a $50 million on-market share buyback was announced on Thursday.
Whether this will be enough to gain investor approval for the new plant remains to be seen. While analysts seem supportive, the final decision will likely emerge from shareholder meetings in the coming days. Regardless, Spurway is prepared with a detailed plan for the new plant, and he also has other potential investments in mind, such as animal feed and AgTech ventures.