Company Overview: Select Harvests Limited (ASX: SHV) is engaged in the processing and sale of almonds to the food industry. It produces almonds from its own as well as leased orchards. It is also involved in the processing, packaging, marketing and distribution of edible nuts, dried fruits, seeds, muesli and a range of other naturally healthy food. The company has a diversified presence geographically, and its orchards are located in Victoria, South Australia and New South Wales with a portfolio of more than ~7,696 Ha. The company’ s processing facilities are located at Carina West, near Victoria and Thomastown, in Melbourne.

SHV Details

Record Production & Demand for Value Added Ingredient Products: Select Harvests Limited (ASX: SHV) is in the business of processing and sale of almonds. The market capitalisation of the company as on 1 February 2021, stood at ~$624.39 million. As per a recent update, the company has announced the completion of the acquisition of Piangil Almond Orchard. The target is considered to be a high-yielding orchard, located in the Sunraysia almond growing region. The acquisition will provide SHV 1,566 Ha of almond orchards, of which 1,177 Ha are mature planting and 389 Ha are immature. The transaction will increase SHV’s planted area by 20% from 7,696 hectares to 9,262 hectares and there will also be an increase in the company’s almond production by ~4,600 tonnes in FY21.

As per the company, it has the ability to optimise its almond yields, manage costs & inputs, which will position it well to leverage on the opportunities as the market recovers.

During FY20, the company reported an NPAT of $25.0 million and an EBITDA of $57.8 million. It has delivered a third consecutive year of increasing crop volume at ~23,250 MT during the year. SHV rewarded its shareholders with a fully franked final dividend of 4 cps, following the half-yearly interim dividend of 9 cps. There was increased traction in demand for almonds during the period, due to the low price levels of almond. Net working capital has increased during the period by 30.8% to $169.61 million, owing to the higher trade receivables and inventory due to a slower shipping schedule because of the COVID-19 pandemic. As on 30^th September 2020, the borrowings stood at $58.98 million.

FY20 Financial Performance (Source: Company Reports)

Record Production of Almonds: SHV produced a record crop volume at ~23,250 MT during FY20. The growth was aided by good growing conditions, investment in frost fans mitigating the impact of frost on the trees and adoption of on-farm technology to track the performance of its orchards. The company has either sold or committed 82% of the crop in FY20, with the balance held to cover internal value-add processing requirements.

Record Production of Almonds (Source: Company Reports)

Demand for Value-Added Products: The company has witnessed strong demand from manufacturers, confectioners and consumers for its value-added almond ingredient products, in both the domestic as well as international market. It reported an increase of 19% in sale of almond ingredients, and accounted for 25% of SHV’s annual almond production. The company’s investments in the Carina West Value facility will further enhance its ability to produce industrial almond products.

Top 10 Shareholders: The top 10 shareholders together form around 31.03% of the total shareholding. Paradice Investment Management Pty. Ltd. and Perpetual Investment Management Limited. are holding a maximum stake in the company at 7.54% and 5.55%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: During FY20, the company reported a gross margin of 19.5% and an EBITDA margin of 17.8%. Net margin during the period stood at 10.1%. The net bank debt was $57.5 million and net bank debt to equity was 0.80x, during FY20. There has been a consistent trend of revenue and profitability increase over the past few years, except in FY20 where results were impacted due to the impact of the COVID-19 pandemic and related timing of customer payments, which is expected to flow through in H1FY21.

Revenue and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group)

Key Risks: The company is dependent on favourable climate conditions for the production of almonds. It is exploring ways to further address the climate change challenge. The company is subject to environmental regulations, and any breach on the agreed terms might cause a problem for the company. Water is a key and limited resource for the company, and a significant amount of capital and time is invested to improve water efficiency. Any instance of inadequate supply of water might impact the ability of the company to continue its operations. To mitigate the risk, SHV has developed a strategy that makes it aware of immediate and future weather patterns, market trends and projected prices.

Outlook: The company has witnessed strong demand in recent times given the historically low almond prices, with shipments up by 21.5% y-o-y, during November 2020. The continued strong shipment numbers from California and Australia augurs well for the company, and it has seen decent demand from the India, China and European markets. SHV expects tree health and crop outlook to remain positive, with suitable contingencies for the forecasted wetter conditions during the harvest time. The company will look to continue its focus on weight accumulation, harvest preparation and orchard hygiene.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company paid a total dividend of 13 cps in FY20, comprising an interim dividend of 9 cps on 3 August 2020 and a final dividend of 4 cps to be paid on 5 February 2021. As per ASX, the stock of SHV is trading below its average 52-weeks’ levels of $4.910-$9.368. The stock of SHV has corrected by 13.15% and 8.84% in the last three and six months, respectively. On a technical analysis front, the stock of SHV has a support level of ~$4.91 and a resistance level of ~$6.74. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We have applied a slight premium to peer average EV/Sales (NTM trading multiple) to arrive at our implied target multiple on the back of record production of almonds, demand for value-added ingredient products, decent outlook for tree heath and crop, and increasing revenue. For the purpose, we have taken peers such as Clover Corporation Limited (ASX: CLV), Costa Group Holdings Ltd (ASX: CGC), to name a few. Considering the current trading levels, increase in production and demand for value-added ingredient products, valuation, and decent long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $5.270 per share, up by 1.151% on 1^st February 2021.

SHV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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