Capilano Honey Limited
 
 
The company is the market leader for honey in Australia and was established in 1953 as a cooperative 100% owned by beekeepers. It was historically a production: driven company with the objective of providing the best market for the honey produced by its shareholders and is now one of the largest packers of honey in the world. Australians trust the brand because it has a recognition factor of 96% and is famous for quality, flavour and innovation in delivery. Around 20% to 30% of its business is exports and the company trades with more than 32 countries. The company has been listed on the ASX since 2012 and its head office is located in Brisbane with operational sites there as well as Perth and Maryborough in Victoria.
 

 

Sources of honey (Source: Company Reports)
 
Half yearly results
 
The company reported half yearly results of net profit after tax (NPAT) of $ 5.12 million compared to $ 2.45 million for the same period in the previous year. This figure is before the impact of the Richlands fire and insurance reimbursements. Revenue shows a growth of 34% to $ 57.9 million because of growth in both domestic and export markets. Net interest-bearing debt has been reduced to $ 4.29 million from $ 7.59 million as at the end of June 2014 and $ 9.75 million as at the end of December 2013. The debt is associated with inventory and working capital requirements and the gearing has been improved by using cash inflows. The average cost of domestic honey for the period has risen to $ 4.61/kilogram compared to $ 3.49/kilogram for the previous year. The price increase shows the increased competitiveness in the market because of competition from packers for supplies from reduced domestic production. The price increase has provided the company's beekeepers with higher rewards for their efforts and will help to sustain the viability of their businesses. Cost increases in raw materials have been recovered from the market through wholesale price increases. Recent rainfall has brought welcome relief to many production areas and will help to set the pattern for the future as trees respond with increased flowering patterns. International demand for the quality premium range of retail products continues to grow in the Middle East and Asia and export sales have increased 19% for the year to date.
 
The board has also announced the acquisition of the Victorian honey packer Yellow Pty Ltd which trades as Chandlers Honey and the assets and trained staff from the acquired business will be used to expand the operational capacity. Simultaneously, the company will be put in a position to absorb an increase in packing demand of more than 1000 t while creating the platform for increased sales.
 
 
 
Summary of half yearly consolidated financials (Source: Company Reports)
 
Profit performance and dividends
 
Profit performance has improved because of the reduction in net debt and working capital has increased in line with the growth in revenues, sales and volumes. Capital expenditure for the new production line and the acquisition has been paid for in cash. The tax liability is due to be paid in February and December and the domestic price for honey has increased in December 2014. The Constitution specifies that the directors may determine that a dividend is payable to the shareholders and also have the power to pay an interim dividend. In determining the dividend (if any is payable), the directors take into account the importance of retaining profits to provide for future operations and growth balanced with the need to reward shareholders. The directors have decided to continue the practice of considering the payment only of an annual dividend.
 
The market
 
As regards sales and marketing, brand recognition and awareness rank at the top and consumer preference for honey remains with the company because of the likes of everybody in the family enjoying these products. The website has been upgraded and refreshed with a notable part of the communication strategy being executed via social media and digital communication. Recently, the focus has been on in-store messaging to reinforce brand heritage, product provenance, the natural production environment and the specialist Australian beekeeping skills. The increase in market share is represented in the following diagram as is the growth in domestic category
 

 
 
Market Share Increase (Source: Company Reports)
 

 

 
Domestic category growth (Source: Company Reports)
 
Marketing premium qualities of Australian honey continues to be a priority for the company and the production, blending and marketing of Manuka Honey continues to make good progress. The company is now marketing a select range of fresh floral honey in glass jars to promote the best product available on the market. The Barnes Naturals products are found exclusively in channels distributing health foods and pharmacy products and are being sold in Australia and Asia. The refreshed brand has made a successful re-entry into the market.
 
The Chandlers Honey acquisition relates to the acquisition of a bulk industrial processing plant located in Melbourne and the plant and equipment will be relocated in the Maryborough facility. The plant packs over 1000 t of honey every year and the vendor and key staff will be employed by the company. Goodwill will be minimal and the relocated site will be fully operational by the start of the next financial year. The site will incorporate new packaging capabilities such as glass retail and the acquisition will provide a much-needed boost to domestic honey supply.
 
Domestic Australian honey continues to be fundamental to business and the future though 2013/14 was one of the worst honey production seasons in history because of adverse weather conditions. Despite the adverse conditions, the imported supply chain has enabled the company to cope with sales demand. This year's crop is more encouraging and recent rains have brought relief to many producing regions.
 

 

 
Honey supply (Source: Company Reports)
 
 
Business strategy and Outlook
 
Marketing support will continue to drive the development of the brand and maintain the market leadership position. Focus will be on expanding the honey category and the usage of the products. Operational cost structure will continue to be improved as will the domestic supply chain. The company will continue to look actively for merger and acquisition opportunities that will deliver benefits from synergy as well as profit growth.


Capilano Daily Chart (Source - Thomson Reuters)
 
However, in our opinion, despite all the favourable factors, we believe that the stock remains overpriced and expensive at the current price levels and recommend that investment should be avoided for the time being.
 

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