Small Caps | Feb 09 2016
-Higher prices, increased demand
-Asian exports up strongly
-Vertical integration strategy
By Eva Brocklehurst
Brokers are buzzing around Capilano Honey ((CZZ)). The company's first half result beat broker forecasts substantially, with profit up 53%. This may have mostly reflected a stock re-valuation because of higher honey prices and increased demand. Nonetheless, the outcome is considered unquestionably strong. Honey is increasingly popular in health remedies, a benefit the company enjoys both domestically and overseas.
The benefits from selling higher margin honeys such as manuka as well as the integration of Chandler Honey (honey supply) and KirksBees Honey (manuka beekeepers) is underpinning the outlook, brokers maintain. Opportunities abound, brokers believe, in the export potential to Asia, with Capilano selling more of its product through Asian websites direct to consumers.
Capilano's Allowrie brand has taken significant market share from private label products in store, given it was not daunted by supply issues this season as well as being supported by the Chandler acquisition and Capilano's ability to import honey. The company has a strategic alliance with Argentina's largest honey producer, HoneyMax, and has rigorous import supply testing in place.
Seasonal variations in honey supply underscore the need to import honey to service both domestic and overseas customers. The company's Allowrie brand usually blends imported with domestic honey. Allowrie is also priced at a lower point than other branded honeys. Honey is a high-value category for retailers, which make more money from Allowrie than private labels. Hence, the rising honey price is a large spur to earnings growth.
The one miss for Morgans in the numbers was weak cash flow, as the company re-built stock, although this suggests a return to more normal seasons after low volumes in recent years. Morgans believes the stock is attractively priced for its growth profile and has an Add rating with a target of $22.80.
Morgans expects FY16 underlying profit to rise 53%, supported by improved seasonal conditions, rising exports and further market share wins, as well as the benefits of higher margin product. Upside could come from further acquisitions, the broker maintains, and from corporatising manuka beekeeping.
Canaccord Genuity also lauds the accretive potential in manuka honey. Even outside of the specialities, the outlook is strong for Capilano, with the honey season likely to be up 15-20% amid buoyant export demand. The broker upgrades to a Buy rating and a target of $21.54, following the recent pull-back in the share price.
Canaccord Genuity expects Capilano will retain its domestic market dominance as well as feed export demand. Moreover, honey consumption lifts in the lead-up to and throughout the northern winter, which should ensure a seasonally stronger second half. Key catalysts for the stock, in the broker's view, are confirmation of a strong honey season and corporate activity, both in terms of acquisitions or Capilano becoming a target.
Canaccord Genuity approves of the vertical integration strategy with manuka honey, which it considers could be highly accretive and deliver further growth in FY17 and beyond, although this is not factored into estimates.
The company does not provide formal guidance but did note its acquisition of KirksBees was progressing well. Capilano cited strong interest in its natural wholesome products, also expecting a new product range will ensure it prospers.
Revenue of $67.1m was up 16% on the prior corresponding half and market share increased to above 76% from 74%. Exports remain a large driver of the results, up 35%, with exports to Asia up 53%. As per usual practice the board did not declare an interim dividend.
Capex rose to $1.96m from $1.74m, stemming from the re-commissioning of the Maryborough factory in Victoria, which has increased the company’s capacity and supply of glass jars and non-honey products. The company also invested in KirksBees to bring it in line with corporatised farming practices. The company spent $6m acquiring KirksBees.
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