Planting for a Brighter 2018
As Australia’s largest almond grower, accounting for over 20% of all almond farms in Australia, and a leader in the processing of nut products, Select Harvests (ASX, SHV) faced some headwinds in 2017. The shares fell due to unfavourable weather conditions and lower orchard yields. Nevertheless, management has pushed for growth and de-risking with the latest round of capital raising positioning the company well for 2018.
Recap
As we’ve noted in our previous reports on Select Harvests (ASX:SHV), 2017 was quite a challenging year for the company given adverse currency fluctuations and unfavourable weather conditions leading to lower than expected crop volumes from a higher presence of blank nuts (missing almond kernels). Given that, the company was forced to ramp up their fertigation (fertilise and irrigate) efforts leading to higher costs.
Despite almond prices remaining firm in US$, the lower volumes, higher costs from fertigation and unfavourable currency movements (which in effect led Almond prices to drop from
A$8.08/kg to A$7.43/kg) severely impacted EBIT which fell 65.9% year-on-year to $17.0 million.
Given the headwinds encountered, unsurprisingly, the company’s share prices took a beating over the year, falling almost 29%. However, management didn’t rest on their laurels and instead instituted some changes and raised capital to push for more growth.
Management has modified their fertigation (fertilise and irrigate) and moisture programs to facilitate better yields and lower costs as well as acquiring Jubilee Orchards in 2H17 to increase crop output with an area of 465 planted hectares. Â Second, management also sought to lower debt to minimise risks and fund growth via raising more equity capital.
An interesting tidbit, in our view, is that the company rebuffed Abu Dhabi-based, Mubadala Investment Company’s efforts to acquire them. The company was willing to offer $5.85 per share in cash which was a 39% premium to Select Harvest’s price at the time. According to management, despite the premium, they believed that this bid significantly undervalued Select Harvests and have opted to seek financing elsewhere.
In response to that bid, management raised capital through a Share Purchase Plan (SPP). In November, the company completed the SPP, raising a total of $90 million in capital by issuing 21.43 million shares at $4.20/share. The funds were then applied to reduce debt and paid for the acquisition of the Jubilee Orchard. Following receipt of proceeds from the capital raising, net debt to equity is now just 15%, leaving the company in a very strong financial position.
Source: 24 November 2017 AGM Presentation
AGM and Beyond
The Annual General Meeting in late November covered strategic initiatives along with market and operational updates, highlighting an improving environment for the company.
First, in terms of production, the company’s almond portfolio now totals 7,490 hectares with 74% of that generating cash. There is also a pipeline of trees that have yet to reach maturity.  According to management, 34% of these orchards are aged 6 years or less and are coming into production over the next 8 years which will bump up volumes significantly. This is captured in the company estimates below.
Source: 24 November 2017 AGM Presentation
Based on their existing portfolio, the company’s 2019 Theoretical Crop would be approximately 17,000 MT – increasing to approx. 21,000 MT in 2022 and 22,000 MT in 2026 – an increase of more than 13% next year and close to 50% over the next four years. Note that as of present, their orchards account for 20% of Australia’s almond industry.
Management has also implemented a new project named Project Parboil which is expected to increase efficiency and processing capacity, while maximising the average price of the almonds. This is one major investment management expects to insulate the company from the effects of the commodity cycle and is expected to create savings of A$2 million per annum at the EBIT level.
Crop Update
Management also provided an update on their crop in late November. According to management, the crop is currently in the weight accumulation stage of the horticultural program – essentially the midpoint between pollination and harvest – which implies that harvesting should commence this month.
It seems that despite the frost in the 2H17, management’s new programs which we mentioned above are proving to be effective, having mitigated the impact with this year’s crop pollination being faster than usual and mostly appears unaffected except for the NSW orchards which may have some damage.
The volumes for 2018 are expected to be much higher given the Jubilee acquisition and young trees coming into production from the Allinga farm. The best case scenario would mean a harvest of 15,816 tonnes, based on planted area, trees in production and average maturity yields while the current spot price for almonds is between A$7.50 and A$8.00/kg.
Management has hedged about 10% of the 2018 Theoretical Crop and this could increase further going forward.
Source: 24 November 2017 AGM Presentation
Turning to the daily chart, initial support is expected at the 50-day moving average (red line) of $4.78, followed by and additional layer between $4.51 and $4.65, if the bears were to maintain downward pressure over the near term. This is made up of the 50% Fibonacci retracement and 200-day moving average (green line) respectively. Positively, 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. Therefore, once this period of weakness is behind us, we would expect the bull-camp to eventually regain upward traction in driving prices north towards resistance sighted at the October 2017 high of $5.33.
For the long-term technical outlook to strengthen, a sustained break above near-term resistance sighted at the October 2017 high of $5.33 as marked by the horizontal thin-red line is required. Should this favourable scenario eventuate, then a broader advance towards the next band of resistance evident between $7.49 and $7.85 is 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.
Summary
Despite a difficult 2017, management has crafted solutions to fight off 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 while 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.
