Small Caps | Feb 07 2017
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First half results for Capilano Honey were subdued after years of strong earnings growth, as the company invests in new product.
-Stronger second half expected with greater contribution from manuka JV
-Margin improvement expected in the shift to higher value honey
-Yet, near-term growth likely to be constrained domestically
By Eva Brocklehurst
There was less buzz in Capilano Honey's ((CZZ)) first half, after years of strong earnings growth, as the company invests in new product. The result was clouded by a move to net pricing, which reduced rebates and overall revenue when compared to the previous corresponding half.
The company made a $2.1m profit on the sale of its bee-keeping operations. The company also incurred $1.3m in extra costs associated with the new honey product, Beeotic, a prebiotic honey. Still, initial sales of Beeotic to China helped boost overall sales to that region by around 87%.
The balance sheet was assisted by an equity raising and asset sales in the half and, in line with the board's policy of only paying annual dividends, no interim was declared.
Morgans expects a stronger second half because of the scaling of the Beeotic sales and a greater contribution from the joint venture in manuka honey. Because of lower sales and increased investment across the business, Morgans downgrades FY17 and FY18 net profit forecasts by -12.7% and -18.9% respectively.
The broker still expects solid earnings growth over the next few years because of the increasing demand from consumers for honey and the benefits from selling higher-margin honey products, as well as rising exports.
Morgans now values the stock at $18.95 a share, down from $23.50, using a blended valuation methodology and focusing on FY18 multiples. The broker applies a small discount to the stock, given it has a materially smaller market capitalisation with lower liquidity. The broker retains an Add rating.
Compared to peers, Morgans considers Capilano Honey is attractively priced. It is a household brand and a market leader in a high-margin, growth category. The broker also believes Capilano Honey warrants corporate appeal, noting the full price that Bega Cheese ((BGA)) is paying for Vegemite, a similarly well-known Australian brand.
Next Six Months Challenging
The first half result was marginally below Canaccord Genuity's expectations, characterised by greater competition in the domestic market and lower export sales. However, Canaccord Genuity believes longer term growth will be supported by the manuka joint venture with Comvita and by Beeotic.
Revenue growth was pleasing given the greater level of supply domestically, which also put more product in the hands of competitor Beechworth. Capilano Honey is envisaged maintaining its market share.
International sales were down 23%, affected by the exit from some low-margin industrial business. The company has plans to re-direct this product to branded sales, which the broker notes has been a successful strategy to shift the mix in the past. Margin improvement has been a factor in the continued shift in mix away from bulk products and the push into higher value honey.
Canaccord Genuity expects the next six months will be challenging from a growth point of view as domestic sales represent over 80% of revenue and competition is likely to increase. Longer term, the company is expected to benefit from its initiatives in export markets
The broker previously applied a premium to the stock but with near-term growth constrained, believes a market multiple is now more realistic. As the near-term outlook is benign the broker reduces its target to $17.23 from $20.22. Hold rating retained.
Forecasts for earnings per share in FY17 and FY18 are revised down -6% and -10% respectively. Should some of the growth initiatives materialise in FY18, the broker believes there is upside to its estimates, which are yet to include specific benefits from the joint venture with Comvita.
Canaccord Genuity (Australia) received fees as joint lead manager and underwriter to the entitlement offer from Capilano Honey in June 2016.
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