Hot Stock: Select Harvest (SHV)

Friday 3rd June 2016

A time to be picky

What’s new?

As the second largest player in the world’s second largest almond market, Select Harvests offers strong leverage to the above thematic view, as evidenced by the company’s results in February.

The company reported an interim net profit after tax (NPAT) of $23.9 million to 31 December 2015, which was 41 percent ahead of the year before. Adjusting for the impact of non-recurring items, NPAT was 8 percent higher at $19.6 million.

Operating cash flows of $80.8 million were some 339 percent higher and allowed the company to reduce debt to $52.6 million, making for a comfortable debt to equity ratio of 17.8 percent. The company was also able to announce an unfranked interim dividend of 21 cents per share, which was 40 percent ahead on the prior year.

Having invested significantly in its crops and food division in previous years, the benefits now appear to be flowing through. The company has an average tree age of between 11-12 years, and is seeking to increase almond production to more than 20,000 million tonnes per annum by 2022/3.

Outlook

Select Harvest released an investor presentation this week which confirmed that all of the company’s major initiatives were on track, but management also lifted full year production estimates. The company has raised its full year volume estimates from 13,700 to 14,000 tonnes. Output is set to rise 3 percent in 2018, and casting the gaze further out, almond volumes are set to rise by 46 percent by 2024.

We also see Select Harvest benefitting from a currency kick if the A$ weakens against the greenback as we expect. This is as the company’s product pricing is effectively benchmarked in US$ terms.

Price

From a valuation perspective Select Harvests is appealing, priced on an earnings multiple of 15 times with a 4 percent yield. We also believe that the market’s assessment of the recovery in almond prices will prove excessively conservative.

In addition to Select Harvest’s positive fundamentals, we note that the company’s technical set up is also supportive, with an initial target expected at the 38.2% Fibonacci retracement of $7.52. Over the longer-term, the 50% Fibonacci retracement level of $8.69 could potentially be on the cards.

Worth buying?

Select Harvests is striving to become the epitome of a vertically integrated almond producer, processer and marketer. The company’s stock though has been under pressure for much of the past year due to a fall in almond prices from elevated levels. Sentiment has improved recently, and looks set to continue turning around with rising almond demand underpinned by changing global dietary habits, whilst the company is also putting through strategic initiatives and ramping up production volumes.

While a higher risk play given the company’s revenues steams are exposed to the vagaries of just one key commodity, we believe the shares offer strong value around the current price.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

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