Company Overview: Select Harvests Limited (ASX: SHV) is engaged in growing, processing and sale of almonds to the food industry from company-owned and leased almond orchards. In addition, it is involved in the processing, packaging, marketing and distribution of edible nuts, dried fruits, seeds, muesli and a range of natural health foods. The company operates in two segments, i.e., Almond Division and Food Division.

SHV Details

Market Leading Investments to Aid Future Business Growth: Over the last five years, the company witnessed a rise of 2.5x in almond industrial sales, backed by its market-leading investments in value-added industrial almond production capabilities. During 1HFY21, the company expanded its planted almond area by 20%, which was aided by the acquisition of 1,566-hectare Piangil Orchard and, as a result volumes soared by 4,592 MT in FY21. The market prices have witnessed a major recovery from their lows of ten years. In addition, the company expects that the market pricing is unlikely to change until the size of the current U.S. crop is confirmed. The company is optimistic that the demand for almonds, including raw almonds and value-added almond products is likely to grow globally.

FY21 Financial and Operational Highlights:

• For the year ended 30 September 2021 (FY21), almond crop volume stood at 28,250 MT as compared to 23,250 MT in FY20, while Almond price stood at $6.80 per kg against $7.50 per kg in FY20. This fall in price was due to record Californian almond crop (3.2 billion pounds) and an aggressive selling program.
• Due to the opening of export markets following COVID-19 related global lockdowns in key markets, SHV recorded a rise in revenue to $228.6 million as compared to $187.1 million in FY20.
• The company’s NPAT for the year amounted to $25.3 million as compared to $29.2 million in FY20. Operating cash flow for the year stood at $38.2 million against $13.2 million in FY20.
• SHV declared a fully franked final dividend of 8 cps, which will be paid on 4 February 2022 at a record date of 10 December 2021.

Almond Volume Trend (Source: Analysis by Kalkine Group)

Market Updates:

• As announced on 26 December 2021, the company’s Carina West site witnessed a fire event in its co-waste handling area, and no injuries to any personnel have been experienced. The company added that Co-waste is a low-value Bi-product that results from the hulling and shelling process of almonds.
• The company is evaluating the full extent of the damage to the site and the related operational impact. However, its primary production and value-adding processing areas and related equipment at the site have not witnessed any direct impact.
• SHV is planning to submit a claim under the policy for the property and related business interruption losses as it maintains an Industrial Special Risks Policy covering its physical assets.
• SHV has changed its registered office to Level 3, Building 7 Botanicca Corporate Park 570-588 Swan Street, Richmond VIC 3121.

Top 10 Shareholders: The top 10 shareholders together form around 38.86% of the total shareholding, while the top 4 constitute the maximum holding. Perpetual Investment Management Limited and Yarra Funds Management Limited are holding a maximum stake in the company at 10.33% and 7.89%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During FY21, the company posted an EBITDA margin of 25.6% as compared to the industry median of 14.5%. In addition, net margin for the year stood at 11.1% against the industry median of 7.2%. On the liquidity front, current ratio stood at 2.22x as compared to the industry median of 1.44x. The company witnessed an improvement in leverage position, evident by 0.67x in FY21 as compared to 0.80x in FY20.

Revenue & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Disrupting Weather Conditions: SHV’s business is highly sensitive to disruptions in weather conditions, which may lead the business to low crop volume and a declining top line.
• Pricing Risk: The company’s operational and financial performance could be impacted by the adverse movement in the prices of the crops.
• Logistics Risk: The Group is prone to logistics risks, and its operations have been impacted by shipping disruption to the markets of India & China.

Outlook: The company is focused on prudent approach for investment to increase its Sorting and Packing capability, which is likely to be completed in February 2022. The water season of 2020/21 has witnessed higher allocations and a movement of prices below the long-term average. SHV believes that the lower water costs will flow into FY2022, with an estimated savings of $6 million to $8 million due to favourable carry-over rates. With respect to Carina West Investment, the company would be focused on increasing the volume and range of value-added almond products. SHV has secured Government funding to develop a Hull to Fertiliser trial plant at Carina West, which will be commissioned in Q3FY22. The company believes that the global macro-outlook for almonds continues to be positive. This would be underpinned by the growing wealth and a higher number of consumers adopting and consuming healthier diets.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

*% 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 stock of SHV is trading near to its 52-weeks low level of $5.910, offering a decent opportunity for accumulation. The stock has been corrected by ~3.55% and ~23.78% in the past one and three months, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ median P/E multiple, considering the COVID-19 uncertainties and pricing pressure, etc. For the purpose of valuation, peers such as Costa Group Holdings Ltd (ASX: CGC), Elders Ltd (ASX: ELD), and United Malt Group Ltd (ASX: UMG) have been considered. Considering the indicative upside in valuation, growth in revenue and earnings, decent crop volume, rising operating cashflow, Government funding, optimistic outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $5.870, as on 10 January 2022, 11:00 AM (GMT+10), Sydney, Eastern Australia.

SHV Daily Technical Chart, Data Source: REFINITIV 

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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