Headwinds Linger for Select Harvests

Small Caps | Nov 24 2022

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

The headwinds that drove a soft FY22 for Select Harvests look to continue to challenge the company in the new fiscal year. 

-Select Harvests reported a soft full year result despite a better than expected harvest and pricing
-The company guided to a challenging year ahead, warning of low prices and high costs
-Recent wet weather could pose risk to realising crop guidance

By Danielle Austin

Analysts anticipate the year ahead will be a challenging one for Select Harvests ((SHV)), as the almond producer faces stagnating pricing and high costs. 

A 29,000 tonne crop over FY22 saw the company report an -8% year-on-year revenue decline to $199.7m and a -32% operating earnings decline to $40.4m. The final crop and realised almond pricing was higher than the company had anticipated, but higher production costs, including elevated growing, drying and processing costs, as well as wet weather, impacted on the result.

Some of these headwinds are expected to linger into the new fiscal year, with a number of key factors underpinning a softer outlook. Firstly, recent wet weather events add downside risk to the company realising its 30 metric tonne crop target in FY23. Secondly, prices remain at cyclical lows driven by softening demand. Thirdly, the company anticipates a significant step up in fertiliser and chemical costs over the coming year, which could drive a -$20m headwind. 

Californian acreage key to almond pricing outlook

California acreage largely sets the tone for almond pricing, meaning material up or downside to harvest yield can have wide-reaching impacts on industry pricing. Stronger shipments out of California are needed to address that region's oversupply, to then drive up pricing. 

The analysts from UBS (Buy, target price $6.40) remain positive on the outlook for almond pricing over the next few years, anticipating prices will rise once oversupply is addressed. The broker anticipates almond prices rising 10% over FY23 to $7.50/kg, further increasing to $8.50/kg in FY24 before reaching a peak price of $8.80/kg in FY24. 

The broker considers the factors driving a softer outlook for Select Harvests to be transitory, but cuts its earnings per share assumptions -71% in FY23 to reflect near-term impacts. 

Bell Potter (Buy, target price $6.20) does not anticipate wet weather to have caused material damage to harvests. The broker expects Select Harvests faces a challenging year, with operating costs appearing to reach a seasonal high during a cyclical low in almond pricing.

Longer term, the broker believes fertiliser and agricultural chemical prices are peaking and global supply growth will slow in outward years, driving an improved supply side dynamic, underpinning the broker’s thesis that the current valuation presents an attractive entry point. Bell Potter downgraded its net profit forecasts -49% and -30% in FY23 and FY24 respectively. 

Wilsons (Overweight, target price $6.54) expects earnings to remain materially depressed through the coming year. The broker waits on further detail as to how recent wet weather, and associated damage to infrastructure, will impact on harvest quality and quantity, but has lowered its expected almond production for FY23 by -8%. Earnings in FY23 were also lowered -71%, reflecting lower revenue and higher production costs. The broker finds Select Harvests’ position as a scale almond producer attractive, anticipating demand for healthy protein and supply constraints to benefit the company ahead. 

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