GrainCorp Ltd (ASX: GNC, OTC: GRCLF) was founded in 1916–in the aftermath of the first rain after a five-year drought Down Under–as part of the Government of New South Wales Department of Agriculture.

It was established as the Grain Elevators Board at a time when workers were manually bagging grain. In 1917 Canadian architect JS Metcalf was contracted to design a terminal in the Sydney suburb of Glebe. By 1918 Mr. Metcalf had completed the design and building of GrainCorp’s first elevator in Peak Hill, New South Wales.

The Sydney bulk grain terminal, Australia’s first, was completed in 1922. Comprising 140 round and interspace bins, the project cost over £1 million, approximately AUD55 million in current terms. This money well spent was the beginning of GrainCorp’s infrastructure, which today gives the company the great advantages it enjoys as a grain-handling network.

The Grain Elevators Board became the Grain Handling Authority in the mid-1980s. Passage of the New South Wales Corporation Act in 1990 the Grain Handling Authority became one of the first government entities to be privatized in Australia. The company was sold for AUD100 million and became GrainCorp Ltd.

GrainCorp established its Marketing business in 1996, making it the first bulk handler to trade grain within Australia. Two years later, in 1998, GrainCorp listed on the Australian Securities Exchange (ASX).

In 2000 the company acquired Victoria Grain, following that up with deals to buy Queensland’s Grainco in 2003 and Hunter Grain in 2007. In 2002 GrainCorp entered into a joint venture with US agribusiness Cargill Inc to purchase Allied Mills, expanding its operations along the grain chain to include production and processing. Allied Mills enabled GrainCorp entry into the bakery products and milling businesses.

The wheat market Down Under was fully deregulated in 2008 with the abolishment of the Australian Wheat Board, which had held a monopoly for more than 60 years since its founding in 1939. GrainCorp now trades grain internationally in its own right, with the Marketing arm of the business operating in Australia, Europe, the UK and North America.

The next strategic acquisition came in 2009, with the purchase of United Malt Holdings to form GrainCorp Malt. This made GrainCorp an international agribusiness and further diversified its operations into grain processing. The acquisition of the German Schill Malz in 2011 allowed the company to serve European and export customers. GrainCorp also acquired a Western Australia malt plant in 2011, expanding its operations to the west coast of its home country.

Today GrainCorp is an international company with over 280 country elevators in Australia. It boasts total grain storage capacity of up to 20 million metric ton spread across more than 2,700 kilometers, from Mackay, Queensland, to Portland, Victoria. It also operates seven bulk grain export elevators, serviced by 20 contracted trains with the capability of hauling up to 4 million metric ton of grain annually.

The company manages a further 1 million metric ton of road transport is managed annually, and the Ports elevate an average of 5 million metric tons of grain and up to 1.5 million metric tons of non-grain commodities each year.

GrainCorp Marketing buys and sells more than 4.5 million metric tons of wheat, barley, sorghum and canola per year, servicing both domestic and international customers. GrainCorp Malt is one of the world’s largest commercial malt producers, producing over 1 million metric tons of high-quality and specialty malts a year for some of the world’s leading brewers and distillers as well as the emerging craft brew market.

We included GrainCorp in the original “8 Income Wonders from Down Under,” the companies that made up the Australian Edge Portfolio in our Sept. 26, 2011, debut issue. Since then the stock has generated a total return in US dollar terms of 46.29 percent, beating the S&P/Australian Securities Exchange 200 Index’s 11.33 percent performance as well as the S&P 500 Index’s 14.93 percent gain.

It’s the No. 1 stock in the AE Portfolio on total return terms, for that matter, and the combined AUD0.30 interim-plus-special dividend it paid in respect of fiscal 2012 first-half (ended Mar. 31, 2012) results, up from a combined AUD0.20 for the prior corresponding period, justify a boost in our value-based buy-under target to USD9.50.

On Tuesday, May 22, 2012, management reported fiscal 2012 first-half earnings that spurred an 8.5 percent intraday rally. From May 21, the day before the announcement, through Jun. 13 on the ASX GrainCorp rallied 7.27 percent, while the S&P/ASX 200 was up 1.12 percent in US dollar terms and the S&P 500 posted a 0.08 percent gain.

The stock bounced back above what was then a USD9 buy-under target after posting results that far outstripped consensus expectations on higher than expected volumes and margins for the Malt division and higher volumes for the Marketing division. These positives offset a slightly lower result from the Storage & Logistics division due to slightly lower than expected grain receivals volumes, higher domestic outloadings and higher than normal maintenance costs in the period.

More significantly, the midpoint of management’s guidance for fiscal 2012 increased 12 percent for earnings before interest, taxation, depreciation and amortization (EBITDA) line and 9 percent for net profit after tax (NPAT) before significant items.

Management issued stronger earnings outlook for all three operating divisions, particularly the Malt division.

This is the real positive from the result. Improved operating efficiency and margins resulting from procurement benefits, including cheaper and higher-quality grain improving production capacity, as well as a reduction in utilities costs and improved mix toward higher-margin craft brewers have increased the sustainable earnings base for this business.

Although the broader market environment for the malt industry hasn’t yet improved as much as the consensus anticipated by this time, operating improvements inspired management’s improved outlook for returns and earnings for the division.

And this, plus the higher cash payout to shareholders, results in an higher long-term valuation for GrainCorp.

Management reported a 36 percent increase in earnings before interest, taxation, depreciation and amortization (EBITDA) over the prior corresponding period to AUD235 million. Adjusted net profit after tax (NPAT) for the six months ended Mar. 31, 2012, was 39 percent higher to AUD122 million, primarily reflecting strong performances by the Country & Logistics and Ports businesses.

GrainCorp declared a fully franked AUD0.15 per share interim dividend, in line with the prior corresponding period, and will also pay a special dividend of AUD0.15 per share. Company policy is to pay 40 percent to 60 percent of NPAT; in strong years the company is “able to ‘flex up’ and return some additional capital” to shareholders via special dividends.

The first half of fiscal 2012 marks the fourth consecutive reporting period for which the company has made such a payment. In November 2010 GrainCorp paid a AUD0.10 final and a AUD0.05 special dividend. It followed with an interim dividend of AUD0.15 and another AUD0.05 special dividend declared in May 2011 in respect of fiscal 2011 first-half results.

Last November the company ended fiscal 2011 with a final divided of AUD0.15 and a special dividend of AUD0.20. Based on recent trends and management commentary about the rest of fiscal 2012 increases for both from fiscal 2011 levels seems likely.

Management revised upward its full-year fiscal 2012 EBITDA guidance range to AUD385 million to AUD415 million from AUD350 million to AUD380 million and its NPAT guidance range to AUD185 million to AUD205 million from AUD165 million to AUD185 million based on strong forward export bookings at its ports combined with improving malt sales and expected earnings therefrom.

With regard to fiscal 2013, which begins Oct. 1, 2012, and runs to Sept. 30, 2013, GrainCorp CEO Alison Watkins noted that the company continues to invest in safety and equipment upgrades on the assumption that it will be “another potentially large harvest.”

“Demand for elevation capacity is very strong, as customers seek to meet international demand,” Ms. Watkins said in a statement released by the company.

The first-half result, according to management, demonstrates “the benefits of strategic focus on deriving value from all points along the grain chain.”

Country & Logistics booked EBITDA of AUD73 million in the first half, up 87 percent, on revenue of AUD311 million, up 10 percent. Carry-in was 6 million metric tons, up from 2.6 million metric tons, and receivals were 11.6 million metric tons, down from 14.4 million. Margins increased to 23.4 percent from 13.7 percent.

Ports EBITDA was AUD74 million for the first half, up from AUD52 million in the prior corresponding period, reflecting an increase in grain export volumes to 5 million metric tons from 3.2 million. Management upgraded full-year export volume guidance to 10 million metric tons from a prior range of 8.8 million to 9.8 million.

The Marketing business had profit before tax of AUD26.6 million in the first half, up from AUD25.1 million, on revenue of AUD936.8 million, up 41 percent, and marketed volume of 3.9 million was up 34 percent.

The first-half result included a net gain on derivatives and commodity inventory of AUD55 million, up from AUD40.4 million in the prior corresponding period.

The majority of the AUD55 million related to Marketing, with a small element relating to the Malt business. Regarding the Marketing component, about AUD39 million, or 75 percent, was realized, while AUD14 million was unrealized. The unrealized portion represents the mark-to-market value of GrainCorp’s commodity inventory and hedging positions at the end of the period.

GrainCorp’s Marketing efforts are focused on buying and selling grain by linking growers and end-users via its supply chain expertise; the company manages the risk related to holding this grain in its supply chain by hedging its grain positions with physical or derivative contracts. The mark-to-market value reflects these positions as well as positions in unsold and hedged grain and sold but not yet delivered grain.

The Malt business reported EBITDA of AUD59.2 million for the first half, up from AUD57 million in the first half of fiscal 2011, on revenue of AUD467.7 million, up 12 percent. EBITDA margin was 12.7 percent, down from 13.7 percent in the prior corresponding period but up from 9.4 percent in the second half of fiscal 2011. Processing margins softened, but GrainCorp realized savings on barley procurement as well as efficiency improvements, and sales volume increased by 39 percent to 669,800 metric tons.

Although GrainCorp is on course to deliver strong fiscal second-half earnings a number of factors could make it pale compared to the second half of fiscal 2011. For instance, the current second half began with “carry-in” of 11.1 million metric tons of grain in storage, more than 1 million metric tons below the 12.4 million the company had going into the prior corresponding period. Year-over-year storage revenues will therefore be lower in the current second half.

As for export volumes, GrainCorp shipped 5 million metric tons in the first half of fiscal 2012, an “extraordinary volume,” according to Ms. Watkins, but due to the high level of grain available for export and good international demand the company expects to export another 5 million metric tons in the second half. This compares with 4.9 million metric tons exported in the prior corresponding period.

GrainCorp’s Marketing business had a solid period as well, selling 3.9 million metric tons for physical delivery in the first half, up from 2.9 million a year ago. The unit also closed sales that as of Mar. 31 was not yet delivered, which generated earnings in the first half in the form of unrealized mark-to-market gains.

When this grain is delivered in the second half the unrealized gain becomes realized. GrainCorp’s fiscal 2011 Marketing profit per metric ton was well above the historical average, and management expects activity in the second half to be at a more normal level of dollars per metric ton than the prior corresponding period.

Operating cash flow for the first half was AUD42.2 million versus AUD133.7 million in the prior corresponding period, the decline reflecting an additional tax of AUD81 million GrainCorp paid in the half due to the lagged effect of its increased earnings in fiscal 2011.

GrainCorp’s cash flow over the year reflects the seasonal nature of its business. In Storage & Logistics the company sees a large build-up of working capital in the first half that unwinds in the second. There are seasonal fluctuations for Malt as well, though management has used its barley procurement program to smooth these out. The commodity inventory associated with Marketing is funded by a short-term trading facility that matches the life of those assets and so typically varies from period to period.

GrainCorp had net debt of AUD605.5 million as of Mar. 31, 2012, down from AUD755.6 million a year earlier. Excluding grain inventory held by the Marketing business, which is funded with short-term financing facilities, core debt was AUD218.8 million, down from AUD227.2 million. Core gearing was 13.3 percent, down from 14.6 percent.

Running on all cylinders in an environment where strong demand for its services looks set to continue for the foreseeable future, GrainCorp is a strong buy up to USD9.50 on the Australian Securities Exchange (ASX) using the symbol GNC and on the US over-the-counter (OTC) market using the symbol GRCLF.

GrainCorp’s fiscal year runs from Oct. 1 to Sept. 30. The company reports full financial and operating results twice a year; it typically posts first-half results during the third week of May, with full fiscal year numbers out in late November.

Interim dividends are usually declared in May along with first-half results. Final dividends are usually declared in November along with full fiscal-year results. The most recent interim dividend of AUD0.15 per share and a special dividend of AUD0.15 per share were declared May 22, 2012. These will be paid Jul. 20, 2012, to shareholders of record as of Jul. 6, 2012. Shares will trade “ex-dividend” on this declaration as of Jul. 2, 2012.

A final dividend of AUD0.15 and a special dividend of AUD0.20 in respect of fiscal 2011 second-half results were declared Nov. 24, 2011. These were Dec. 21, 2011, to shareholders of record on Dec. 7, 2011. Shares traded “ex-dividend” as of Dec. 1, 2011.

Dividends paid by GrainCorp are “qualified” for US tax purposes. The Australian government withholds 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the analysts who cover the stock five rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while five rate it a “hold” and four say “sell.” The average target price is AUD9.24, with a high of AUD10.60 and a low of AUD6.89.