Improving Conditions
Australia’s largest almond producer, Select Harvest (ASX:SHV), recently reported its first half 2018 results showing the company faced a tough environment in the period with weaker prices for almonds. However, recent developments look to be favourable for the company considering that the world’s largest supplier of almonds is facing headwinds from bad weather and am ongoing drought leading to rising prices.
What’s New?
In our previous coverage of the stock back in early February (FAT-AUS-858) we covered a few salient updates from the company’s recent capital raising for the acquisition of Jubilee Orchard as well as its Annual General Meeting and crop updates which indicate a much better 2018 crop compared to the previous year.
Since then, the most relevant developments on the company’s side have been the release of its First Half (1H) 2018 numbers as well as the its 2018 Crop Update which will be the main focus of today’s report.
1H18 Results Review
Starting from the top and statutory revenues for the 6-month period to 31 December 2017 were $112.95 million, a fall of 10.7% year-on-year compared to the previous year’s result. The company did provide “normalised” results to take into account variations in the yield (frost damage) and price for the 2016 and 2017 crops and the result is a slightly lower decline of 7.7%.
The graphic below summarises the interim period’s results:
Source: Select Harvests (ASX:SHV) 27 February 2018 Company Presentation
Breaking down revenues across the two divisions (Almond and Food) and we see that the both divisions reported declines in revenues with the Almond Division reporting a 14.1% decline in external sales to $40.15 million, impacted by unfavourable currency movements and declining prices year-on-year.
Source: 17 April 2018 SHV PAC Partners AgFood Life Science Conference
1H18 Reported EBIT of $11.5 million was lower by 26.1% year-on-year mainly due to the aforementioned headwinds. However, adjusting for the prior year’s crop yield and prices and the Almond Division delivered Underlying 1H18 EBIT of $12.6 million against 1H17 EBIT of $11.1 million, up 13.2% year-on-year.
Going forward though, the company forecasts a more favourable market environment for almonds considering the recent developments. First off, the US almond market may be in trouble considering that California produces over 80% of the world’s almond supply yet is currently facing adverse weather conditions with numerous frost events and worsening drought as shown in the graphic below.
Source: California Department of Water Resources
On the other hand, demand for almonds remains strong and is in fact growing with the company stating that the “current strong demand is expected to continue as manufacturers increase and expand the use of Almonds and more consumers integrate Almonds in their diets.”
In light of this, the company is leveraging this opportunity to focus on exporting more. Supporting this, the company expects a better 2018 crop which is estimated to be around 15,000 MT, assuming normal harvesting conditions prevail. This compares to the 14,100 MT achieved in 2017 representing an increase of approximately 6% year-on-year. The increase is a result of the acquisition of Jubilee Orchards in the 2H17, as well as some underlying improvement in yields and the maturing profile of the relatively young Greenfield orchards.
The Food Division on the other hand, faced headwinds in the domestic market with the Lucky brand reporting loss in market share to Coles which launched an expanded own-brand line up, as well as higher prices of Cashews.
However, this was partially offset by growth of the Sunsol product range which saw domestic and international sales growing in excess of 40% year-on-year though it wasn’t enough to buoy results as revenues declined 11.1% year-on-year to $69.26 million and EBIT fell 37.1% year-on-year to $3.18 million.
Going forward, the focus of this segment will be geared towards international markets given the increasing consumption trends, especially in both China and South-East Asia. Export related sales were 65% higher than the previous corresponding period.
The company has also terminated its relationship with Sinotrans International Supply Chain due to performance not meeting par. That said the company is seeking partnerships with large local distributors to deepen its presence in the China and wider Asian market.
All in all, the lower revenues significantly impacted reported Net Profit after Tax (NPAT) of $6.3 million, representing a drop of 45.9% year-on-year. However, the 31 December 2016 reported results exclude significant adjustments made in the 2H17 relating to both Almond crop size and realised price/kg. Adjusting for such, Normalised NPAT was more muted with 1H18 at $7.04 million, representing a 17.2% decline.
Going forward, the outlook for the company in 2H18 is looking brighter given the improving business fundamentals. That said, management will increase focus on reducing costs and improving efficiencies. They expect to deliver a 9% reduction in cost-per-acre on orchard related costs (the biggest segment of operating costs).
The company is also working on increasing Parboil output which is currently operating below assumed levels. Management expects output to increase, in line with harvest yields, as they make adjustments to machine components and operational/production planning.
Trading Update
The company also provided a crop harvest in Mid-April indicating a solid harvest in line with expectations. According to the filing, the company expects to reap a 15,000 MT crop this season, despite last October’s frosts impacting the NSW orchards. So far, 90% of the 2018 crop has been harvested with 80% of its already delivered to the Carina West processing Facility.
Source: 17 April 2018 SHV PAC Partners AgFood Life Science Conference
We also like that the aforementioned headwinds in California are seeing almond prices surging to circa $8.10 to $8.50 per kilogram, compared to the $7.55/kg in February. The company has received commitments for 45% of the current harvest implying an improving average price year-on-year.
Looking at the monthly chart, a break above resistance at the October 2017 high of $5.33 is bullish. A broader advance towards the next band of resistance evident between $7.49 and $7.85 is now viable. This is made up of the 38.2% Fibonacci retracement (red set of retracements) and the July 2016 high (horizontal solid-red line) respectively.
Turning to the daily chart, the technical picture has improved markedly. From a bird’s-eye view, the series of higher lows (i.e. troughs) and higher highs (i.e. peaks) are indicative of a medium-term uptrend in place. Prices have eclipsed resistance at the October 2017 high of $5.33, and in turn the next band around $5.99. The next layer of resistance comes in at $6.46 and is now in focus.
Summary
Despite a difficult 1H 2018, management has crafted solutions to fight off the earnings headwinds and hedge some of the risks, locking in favourable prices while setting up for the longer term through orchard growth.
Over the longer-term, we believe that Select Harvests (ASX:SHV) remains a strong (albeit high risk) play on changing dietary habits globally which are going to underwrite almond demand in the coming years. Meanwhile supply on the other hand faces several important constraints, proving a favourable backdrop.
Accordingly, Select Harvest (ASX:SHV) will remain held in the Fat Prophets Portfolio.
Disclosure: Select Harvests (ASX:SHV) is held within the Fat Prophets Small & Mid Cap Model Portfolio.
