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Select Harvests On Target For Record Production

Small Caps | Nov 29 2016

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

Almond producer Select Harvests is on target for record production in FY17 and has flagged improved farm management practices.

-Food business to endure fall in earnings after record FY16, as lower almond prices are passed on
-Minor delays in projects not expected to affect FY17 earnings
-Stock considered fairly priced in the absence of a material rise in almond prices or larger crop


By Eva Brocklehurst

Almond producer Select Harvests ((SHV)) has confirmed expectations for improved yields and record production in FY17. Harvest volumes are expected in the range of 15,500-16,000 tonnes, broadly in line with broker forecasts. This implies 10-12.5% growth on FY16 production of 14,200t. The average yield per acre is 1.21/t, up from 1.15/t last year.

Spot pricing for almonds is indicated in the range of $7.50-8.00/kg. Furthermore, around 17% of the anticipated crop has been sold forward in this range. Development of new orchards is on track and Select Harvests is actively looking for further acquisitions of mature orchards and food businesses. After a record result in FY16, the food business is expected to endure a fall in earnings in FY17, as lower almond prices are passed on to customers.

A minor delay to the value-adding new facility and a nine-month delay to the commissioning of its biomass electricity co-generation plant, as well as recent storms, are not expected to affect FY17 earnings. The biomass electricity co-generation plant is now expected to be commissioned in the first quarter of 2018. This project will convert almond by-products such as hull, shell and orchard biomass waste into electricity, to be used to run the Carina West processing centre and deliver power to a neighbouring farm.

Excess energy will be returned to the grid and offset the company's other usage in Victoria. The project is expected to result in a reduction in the company's carbon footprint by 27%. Project Parboil, Select Harvest's value-adding facility, will increase the company's ability in paste making and improve efficiency, in order to grow the industrial and export business. Both projects are expected to contribute around $4m to EBIT (earnings before interest and tax).

Nevertheless, UBS notes the focus for investors remains fixed on the world's largest producer, California, where the crop harvest appears to be up 10-15%, as well as the speed of Californian shipments, up 40% year to date. At this stage the broker does not envisage a need to alter its assumptions or estimates. UBS retains a Neutral rating and $6.65 target.

Morgans upgrades forecasts as the company signals improved farm management practices. Despite isolated storms and hail across two properties in Victoria and South Australia, 2017 cropping averages have not been significantly affected. The company is also benefiting from materially lower water prices in FY17, compared with very high prices in FY16.

The broker considers the stock to have a portfolio of high quality assets and strong management of what it can control, investing in sustainable growth, productivity and risk management. There are barriers to entry given there are a few places in the world where almonds can be grown and there is a large capital cost and long lead time to maturity.

Morgans notes the stock is fairly priced, in the absence of the almond price rising materially above the current level, or the crop being larger than anticipated. The broker has a Hold rating and $6.90 target. The main risks for Select Harvest are considered to be weaker-than-expected US-dollar almond prices, a rising Australian dollar and/or rain at harvest (February).

A trough in the almond price has helped the share price, as near-term prospects improve, and Bell Porter had already assumed a yield slightly above the theoretical yield in FY17, given the below-theoretical result in FY16 and the biennial nature of the crop.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, lifts its target to $7.22 to reflect the uplift in average spot values since last updating on the stock. The broker's target price is weighted 50% to spot pricing. On current share prices the company looks to be balancing the positives on expanding its productive asset base against the prospect of subdued almond prices, as the expanded Californian acreage matures. Bell Potter retains a Hold rating.

Around 74% of the company's orchards are generating cash and its expansion plans mean production should increase over 23,000t by 2025, which is a 63% increase on FY16. The company expects to plant 1,000 acres in July 2017 and 2018, to be funded by a third party.

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