Almond grower Select Harvests is facing more subdued almond prices but an accretive new orchard and improved yields suggest FY18 should be positive.
-Global almond prices have stabilised and management expects 2017 prices of $7.50-8.00/kg
-Investor confidence negatively affected by potential oversupply in the US
-Gearing stepping up, although there is room as cash is being generated
Almond grower Select Harvests ((SHV)) is facing a more subdued almond price in 2017 as Californian growers, the major suppliers globally, return from three years of drought. Yet following the accretive acquisition of a new orchard and improved farming practices increasing yields, brokers are quietly confident for FY18.
The company reported a first half cash net profit of $13.1m for FY17, which compares with $44.3m in the prior corresponding half. Cash operating earnings (EBITDA) were reduced to $26.5m from $61.9m. The company’s food division was affected by price deflation in the trading business and a rapidly falling almond price affected that division.
Management has committed to the long-term build up of scale and has leveraged its large fixed cost base through both acquisitions and organic means. Canaccord Genuity observes this investment in growth is a drag on near-term cash, and gearing is expected to rise.
Global almond prices appear to have stabilised and management expects the pooled price for 2017 to range between $7.50/kg and $8.00/kg, which compares with $7.70/kg obtained in 2016. The price range is in line with prior estimates and around 30% of the 2017 crop is committed at $7.70/kg. the company has upgraded FY17 production estimates to 15,750-16,250t.
The results include an unfavourable carry-over of inventory. When adjusted, Bell Potter calculates a more modest 2% decline year-on-year in net profit and a slightly stronger forecast. The company has also announced a $26.5m investment in acquiring the Jubilee orchards and a 22% interest in a 10,000t primary processing facility. This should provide an additional 1,000t of almonds from FY18.
Californian shipments have increased 33% in the year to date. The Californian drought is over following record snowfalls in the previous three months but the bloom and recovery has been disrupted, potentially affecting next year’s supply. Investor confidence continues to be negatively affected, the broker observes, by the potential oversupply in the US as yields improve.
Canaccord Genuity acknowledges Select Harvests has a strategically relevant asset, with an improving yield and production profile, and operating leverage will aid future profitability if and when almond prices revert upwards. The broker, not one of the eight monitored daily on the FNArena database, has a Hold rating and $6.00 target.
Morgans has also reduced crop forecasts, and net profit by 25%, because of the lower almond prices. Profit estimates from FY18 are upgraded to account for the acquisition of the Jubilee orchards. This acquisition, along with improved yields from existing orchards and two growth projects, should underpin strong earnings growth in FY18 as long as the current almond price holds up.
The main risks to the broker’s forecast is falling US dollar almond prices, a rising Australian dollar and/or rain at harvest. Following significant share price weakness, Morgans considers the stock is been oversold. The focus is now on FY18 fundamentals and the broker finds the valuation attractive, trading on FY18 forecast price/earnings ratio of 11.2x. Consequently, the broker’s rating is upgraded to Add from Hold. Target is $6.05.
Morgans notes the barriers to entry exist in this market, given there are few places in the world where almonds can actually be grown and there are large capital costs and long lead time to mature production.
Almond prices appear to have formed a floor, and while Bell Potter does not expect a material pick up in pricing in the near term, volume growth is expected to carry the business. With this in mind, and in light of the recent share price correction, the broker, not one of the eight monitored daily on the database, upgrades to Buy from Hold.
The stock lives for the almond price, UBS believes, and falling prices suggest estimates need to be cut. The company’s cash flow was weaker than expected in the half year, although this was attributed to a large payment of tax. UBS reduces its medium-term almond price forecast to $7.50/kg.
While gearing is stepping up a notch the broker estimates there is still room on current forecasts. The company is generating cash and is expected to eliminate its existing bank debt by FY18-21. While near-term conditions support an appreciation of the almond price because of concerns around the Californian bloom, US inventory clearance needs to be maintained at record levels and FX remains a risk, in the broker’s opinion.
Despite the benefits of spreading weather risk, UBS does not expect Select Harvests to pursue offshore expansion, although it could leveraged its expertise to produce other nuts or increase the target acreage for almonds over the next decade. Neutral rating retained and the broker’s target is $5.43.
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