Select Harvests Readies For Substantial Growth

This story features SELECT HARVESTS LIMITED. For more info SHARE ANALYSIS: SHV

-Almond prices still firming
-US supply constraints continue
-Susceptible to AUD/USD variance
 

By Eva Brocklehurst

The US crop of almonds appears, on Bell Potter's calculations, to be around 10% short of current US Department of Agriculture forecasts, with reports the harvest of the main Nonpareil variety in California is down 15%. As the harvest proceeds, prices are firming and this should encourage Select Harvests ((SHV)) as it sells forward its crop from December.

The company's earnings are very sensitive to almond prices and the Australian currency, with a 10% change in each resulting in a 15-20% change in Bell Potter's FY15 earnings estimates. The broker has adjusted forecast to reflect the company's recent land bank acquisitions and its capital raising. Select Harvests has furthered its investment in planted acreage and new orchard development. In aggregate these acquisitions suggest to Bell Potter production could grow over the next three years by 13-16%, with a doubling from FY14 levels when the orchards mature in 2024-25. The initial orchard investment is now 100% equity funded and, on a stand alone basis, is 5-10% earnings dilutive in FY15-18. The equity dilution is greater than the initial earnings uplift.

Bell Potter has raised Select Harvests' FY15 almond price estimates to $8.42/kg from $8.15/kg but the diluting impact of the equity raising means the net effect is a downgrade to earnings per share of 2.6% in FY15 and 7.2% in FY16. The broker's target lifts to $5.97 from $5.08, reflecting an uplift in valuation for company-owned orchards and an assumption that a funding agreement for the orchard developments can be reach.

WilsonHTM's positive outlook is underpinned by expectations of substantial production growth and the recent acquisitions. A downgrade to earnings per share, by 1.9% in FY15 and 3.0% in FY16, reflects the dilution of higher-than-expected participation in the recent share purchase plan. Proceeds of $19.7m were confirmed from the Share Purchase Plan, against the broker's forecast of $5m. In combination with the recent placement this raises a total of $66m. WilsonHTM's target of $6.97, reduced from $7.11, reflects a 5% discount to valuation to allow for the execution risk in the orchard development program. The broker retains a Buy rating, expecting strong consumption growth and supply constraints will support attractive pricing in the medium term. 

Bell Potter has reservations around the long-term sustainability of US dollar almond prices and the potential impact on Select Harvests, given it is one of the most sensitive exposures to the Australian/US dollar in the agricultural sector. The broker prefers a Hold rating, envisaging near-term earnings have a bias to the upside, despite the longer term concerns.

See also, Select Harvests Rolling In Clover on September 4 2014.
 

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