Small Caps | May 27 2020
Select Harvests has withstood a low almond price during the first half although brokers expect a recovery into FY21 is more than likely.
-Disrupted access to Indian markets and food service channels
-Prospects for pricing to improve as trade resumes
-Prices expected to stabilise once US harvest commences
By Eva Brocklehurst
Elevated water costs are expected to continue weighing on Select Harvests ((SHV)) into the second half and FY21 but almond prices are expected to recover from weak levels.
Disrupted access to Indian markets and food service channels stemming from the pandemic have affected the almond price, although impacts on revenue and costs are largely expected to reverse in the second half.
The company delivered its second consecutive strong yield in the first half, although operating earnings were softer than Bell Potter expected, reflecting higher corporate charges, a lower contribution from the food operations, lower pricing and volume estimates for the FY20 crop.
The broker, which has a Buy rating and $8 target, expects that when trade resumes and food service channels re-open the prospects for pricing will be better. Bell Potter reduces expectations for the price going forward to reflect the disruption in the supply chain over the next 12 months but assesses it would not be unreasonable, based on company commentary, to expect net profit in the region of $36-38m.
The main negative in the first half, UBS observes, surrounded pandemic-related market access, primarily in India, which has driven spot pricing down to US$2.08-2.23/lb ($7-7.5/kg).
UBS points out, if prices are sustained at current levels for the rest of FY20, then risks are heightened because purchasers may try to exit or default on agreed terms. The broker assumes an Australian $7.75/kg price for FY21 with a progressive recovery from the current lows into the key selling period of October-March.
UBS has feedback which indicates Californian pricing for this year's crop is likely to be materially higher than current levels – which at US$2-2.15/lb is around the US cost of production – and expects demand side impacts will be largely temporary.
Select Harvests anticipates prices will stabilise once the US harvest commences in August. While there was no formal earnings guidance, the company has indicated FY20 production is in line with FY19 with prices of around $8.20/kg.
UBS calculates a $8.35/kg price implies a 25% uplift to FY21 estimates for earnings per share. The broker also notes the company has a strong balance sheet that provides options for growth, and industry dynamics are highly supportive. UBS maintains a Buy rating with an $8.15 target.
Wilsons suggests there is plenty of work required, given depressed almond prices, and water costs remain a headwind. The recent renewal of leases at higher prices is delaying the full benefit of lower spot prices for water.
However, the stock has attractive features as an investment with almond consumption growing and a globally competitive cost of production. Wilsons has a Market Weight rating and $6.53 target.
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