Select Harvests’ Outlook Curbed By Improved US Conditions

This story features SELECT HARVESTS LIMITED. For more info SHARE ANALYSIS: SHV

-Potential for more pricing uncertainty
-Forward demand still positive
-First half cash flow likely strong
 

By Eva Brocklehurst

There is good and bad in everything. Australian almond producer Select Harvests ((SHV)) was in an enviable position when prices surged over the last several years as drought engulfed California, the world's major producing region for the nuts.

Now with an El Nino event heralding a dry period in Australia's producing regions, California is receiving some much needed rain and snow fall. Current precipitation has eased the impact of the drought although larger rainfall is required, brokers note, before the impact of the long drought is fully mitigated.

Still, the prospect of a larger US crop, softer global demand, and some instances of customer defaults – albeit not for Select Harvests – have dented the almond price. Select Harvests has flagged prices are now down 10-15% from its FY15 pool price of $11.45/kg. While management was keen to suggest market conditions remain favourable, as forward commitments in the US are up 11%, the weaker pricing will have a negative impact on earnings in FY16-18.

Goldman Sachs lowers FY16, FY17 and FY18 earnings forecasts by 25%, 18% and 14% respectively to reflect weaker prices. The broker forecasts an almond price of $10.37, $10.13 and $8.86 per kg over those three years respectively, driven by the assumption that the Californian drought is receding and US crop yields are returning to normal. Goldman retains a Neutral rating and its target, lowered to $7.87 from $9.65, is based on a 25% price/earnings discount to the Small Industrials, reflecting the inherent agricultural risk.

Canaccord Genuity considers the downgrade to pricing has been largely factored into investor mindsets. The broker's analysis of the US harvest over the past five years reveals the percentage of US crop typically shipped from August to December averaged 45.6%. This year's stands at 32.3%, ascertaining a subsequent build up in inventory has resulted in almond traders clearing stock at lower prices.

The peak in the almond price was flagged in earlier commentary but Canaccord Genuity acknowledges its previous price forecasts were too optimistic. Short-term assumptions are further downgraded by 14.0% and long-term assumptions by 6.0%. The broker's long-term forecast almond price is around 25% below FY15 levels.

Despite the negative impact on investor confidence the broker notes the company has a strategically relevant asset, with an improving yield and production profile, and an opportunity to vertically integrate its business model over coming years. This should be the focus for investors in 2016. The broker's Buy rating is unchanged and the target reduced to $8.35 from $10.34.

After revising its estimates for prices lower Moelis notes the reversion to long-term averages will have a negative impact on earnings. The speed of the reversion has also been revised up. With relatively flat harvest volumes expected over the next five years this will put downward pressure on Select Harvest earnings. That said, while trimming assumptions, there is little change to the broker's underlying methodology.

Selling pressure is likely to exist in the short term but, on a 12-month basis, the broker considers the stock is oversold and retains a Buy rating, reducing the target to $9.25. Based on timing, first half sales reflect the unwinding of cash receipts from the sale of the prior year's harvest. Given the strength of Select Harvest's FY15 crop and high prices, strong cash flows are expected in the first half.

Morgans plays safe and downgrades the stock to Hold from Add. The company's sensitivity to the almond price is high, with the broker noting every US10c movement in the US dollar price per pound equates to the company's earnings declining by 6.6% based on forecasts. Morgans forecasts underlying profit in FY16 to fall by 17.5%, based on an expected almond price of $9.73/kg.

Almond prices have peaked and the broker believes the earnings upgrade story which drove the share price to record highs is over. While acknowledging the argument the stock is oversold relative to the fall in the almond price, Morgans is concerned prices may fall further. The company is controlling what it can, investing in risk mitigation, sustainable growth and increased scale and the broker would return to a more positive view if almond prices rise. Target is reduced to $7.50 from $12.00.

UBS lowers earnings forecasts by 42% for FY16 and by 8.0% for FY17. The broker accepts there is now additional risk to forecasts but also suspects a strong rebound in almond prices could occur in coming months.

California’s snow pack, a critical water source for almond orchards, is rebuilding in line with a normal year but, even if there is widespread snow in California over the remaining two months of winter, this is not likely to result in a significant rebound in production before the end of 2017, given the biennial nature of almond trees.

UBS believes there remain opportunities for the company over the longer term through further operational improvements and the company could even consider expanding offshore or into other nut varieties. UBS retains a Buy rating and lowers its target to $10.20 from $13.65.

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