Small Caps | Jun 01 2017
Almond yields have fallen for Select Harvests, which has issued its second downgrade to production forecasts in as many months. Brokers opt for conservatism ahead of confirming 2017 as a one-off.
-Wet weather in spring causes unfortunate production slump in a "positive" year
-Californian production growth more subdued than anticipated, stable prices expected
-Provided the downgrade is confined to 2017, prospects are considered favourable
By Eva Brocklehurst
Almond yields have fallen for Select Harvests ((SHV)) and, with the harvest now 98% complete, volumes appear well below most expectations. The company has indicated production volumes of around 13,500-14,000 tonnes, having guided to 14,500-15,000t in April. Price forecasts are unchanged and in a range of $7.50-8.00/kg. Sales commitments, comprising 60% of the crop, have been made at these prices.
UBS observes it is unusual for such a downgrade to production to occur in a biennial positive year. Yields can usually outperform every second year. The impact from wet weather on production is to blame and, being purely an agricultural event, the broker would not necessarily extrapolate this to forecasts beyond FY17 earnings and FY18 cash flow.
Canaccord Genuity observes that, given the large fixed-cost nature of the business, a -5-10% downgrade to the crop has a greater-than-anticipated impact on earnings per share. The broker also revises down its FY18-22 crop estimates by -13%.
An abnormally high level of undeveloped nuts was due to an unseasonally wet spring and mild summer, as the trees held onto the “blanks” until harvest. Canaccord Genuity's feedback suggest this is a systemic issue across the domestic almond industry, as the three largest operators are also revising down crop estimates.
Moelis also materially reduces earnings forecasts for FY17 and FY18, by -46% and -19% respectively. The broker suspects the deteriorating volumes could be offset by stable pricing. Nevertheless, given the second downgrade in as many months, a Hold rating and $4.56 target are maintained.
Bell Potter was disappointed with the trading update and downgrades forecasts for FY17 net profit by -39% and FY18 by -24%, reducing its target to $4.60 and retaining a Hold rating. While the broker believes the company should be the beneficiary of an expanding acreage in FY18-20, there is also the prospect of weakness in almond pricing as the expanded Californian acreage matures.
After very optimistic forecasts for California's crop, the mainstay of global supply at 80%, initial forecasts are now estimating 2.8% growth and this, UBS believes, will be generally supportive of almond prices.
Moreover, the broker now calculates that Select Harvests is a lower-cost producer than the median Californian grower, ahead of the expected increase in California's ground-water costs, as basin plans are put in place over 2017-20. Still, California's production forecasts range widely and remain highly uncertain up to harvest in August-October.
Canaccord Genuity was previously conservative regarding the stock, in relation to the potential glut emanating from a larger US crop as the drought in California ended. Yet the recent US statistics are notably benign because of poor weather conditions in that part of the world through a long blooming period. The broker points to the US official forecast that is due in July, which will pride further clarity on the crop estimates and pricing expectations for FY18.
UBS further notes that Indian wholesale almond pricing has remained relatively flat over 2017 and this is consistent with the unchanged price guidance from Select Harvests, calculating this to be commensurate with its long-term almond price, at around 39% above farm costs. The broker maintains a Neutral rating and $4.56 target.
The main risks to UBS forecasts are the impact of a biennial negative year in FY18 and a sharp rebound in Californian yields. By FY20 one the broker estimates the company will produce over 22,000 tonnes of almonds. The broker does not expect the company to pursue offshore expansion but asserts it could leverage expertise into other nuts or increase the almond area target.
Canaccord Genuity suspects a large disparity between actual and forecast yields will affect short-term shareholder sentiment, and the likely material increase in US almond supply remains a structural concern over the medium term. The broker has a Hold rating and $5.17 target.
Wilsons, reluctantly, downgrades Select Harvests to Hold from Buy. The issue is theoretically confined to the current year, but the broker has opted to be cautious and lowers longer-term yield assumptions by around -5%. While the production profile implies significant growth over the next seven years, Wilsons singles out gearing as an issue as it is approaching uncomfortable levels.
Morgans has also decided to be more prudent with its assumptions in FY18 and FY19, until assurances are provided that there are no lingering effects on future yields. Net profit forecasts are lowered for these years by -10.0% and -10.7% respectively. The broker retains a Hold rating and $4.75 target and reduces underlying net profit estimates for FY17 by -24.8%.
Strong earnings growth is still expected in FY18, reflecting the recent acquisition of orchards and the two growth projects. The broker also flags gearing, given the deteriorating short-term profile, moving above the target of 40%.
Clearly, 2017 has been a tough season for the company but yields for a number of agricultural businesses have been affected by the wet weather that occurred during crop development in spring and early summer. Provided the issue is contained to the FY17 crop and pricing remains stable, Morgans suggests the prospects for the company are favourable.
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