Almond grower and processor Select Harvests ((SHV)) has used strong cash flow from both its almond and food division over FY19 to pay down all debt, ex leases, and underpin growth in the future.
FY19 results were ahead of broker estimates while yields in the almond divisions were above historical industry averages, and there was of -15% reduction in production costs per kilo.
Operating net profit of $53m was up 160%, including an unfavourable marking to market of the 2018 crop. Almond earnings increased 132% because of higher prices and the best crop yield for the past decade that comparably offset higher water costs.
There was no formal earnings guidanceprovided for FY20 but the company assesses, based on a yield of 1.35t/acre, the theoretical crop would be around 21,000t with scope for a variance either way of 10%. Bell Potter upgrades estimates for FY20 by 8% and FY21 by 18% to reflect changes to yields, costs and pricing assumptions and assumes FY20 yields are -5% below theoretical levels.
The company generated $46m in free cash flow in FY19. UBS forecasts net debt in FY20 of $600,000, signalling the company could use around $80m of its $100m in undrawn facilities for growth and retain an acceptable leverage ratio of around 1x operating earnings.
The broker also envisages potential for geographic diversification amid expansion opportunities in California. Wilsons, too, notes the potential for further investment in almond and/or macadamia production.
Prices
With Californian crop commitments up 18% over the year and volume risks to the downside, UBS envisages a favourable pricing outlook and upside risks to estimates, maintaining a Buy rating on the stock with a $9.10 target.
Bell Potter suspects Select Harvests will have greater operating leverage to elevated almond prices in the current cycle and also has a Buy rating with a $9.10 target, noting pricing trends in Australian dollars are reasonably strong in both Australia and the US.
Australian port prices are $9.90/kg while US prices are around $8.50/kg. The broker compares this to FY19 realised prices of $8.60/kg, noting this was achieved at an Australian dollar rate of just under US$0.71.
Water
The price of water remains a substantial challenge and elevated costs are expected to persist in FY20. Water costs were up 30% in FY19 on a per kilo basis, although the company has indicated that it will not be fully impacted by current pricing given prudent management of water purchases.
With water purchases now largely complete for FY20, Bell Potter assumes costs of water are in line with the allocation pricing over the year to date on the company’s unhedged requirements. Given lower projected yields and elevated water costs, the broker’s forecasts project a 23% increase in the cost per kilo.
Wilsons points out Select Harvests is currently below its targeted water entitlement level and may need to allocate expenditure to address the situation over the next couple of years. Meanwhile, Phytec technology has been installed and the company is targeting a -8% reduction in water usage without an adverse impact on yield, and remains confident in its ability to maintain yields above industry averages.
Wilsons assumes crop yields normalise in FY20 and, along with further significant increases in water costs, this drives expectations for an earnings decline in FY20. Still, the broker believes the production growth profile offers investors an opportunity to invest in sustained growth and the share price broadly reflects fair value, maintaining a Market Weight rating with a $7.71 target.
