Rain Dampens Select Harvests’ Outlook

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

-Rain reduces yield/quality
-Strong almond prices compensate
 

By Eva Brocklehurst

Select Harvests ((SHV)) has a problem which is the envy of the rest of regional NSW. Rain. The company has been prevented from harvesting the remainder of its almond crop – around 16% – because of continued rainfall in the state's producing areas in the Riverina. Morgans believes it's too early to assess the earnings impact, but rain at harvest time is a negative and reflects the hazards in agriculture. Not only is the volume affected but quality issues resulting from rain at the wrong time can result in a fall in grade and prices.

At this stage, Morgans assumes that 10% of the crop is at risk and reduces its yield estimate by that factor, while increasing cost assumptions relating to production and harvesting. As a result, the broker's FY14 net profit forecasts have fallen by 18%. On the positive side, that forecast is still up 45% on FY13, because the almond price is materially higher. Almond prices were around $6.60/kg in 2013 and the company received $5.03/kg for the 2012 crop.

Assuming an average season in FY15, Morgans expects further strong earnings growth. Earnings are then expected to fall in FY16, as some of the older orchards need replanting and the broker assumes a more conservative price for almonds. Demand for almonds remains strong in global markets and many are low on inventory. Hence, prices are expected to stay firm and the broker retains an Add rating.

Moelis also expects some offset to the lower harvest from strong almond prices, as the average price has remained over $9.00/kg since last November and 55% of the crop is now sold. The broker is downgrading estimates primarily on the likelihood that final tonnage will be lower and there will be higher production costs from the adverse weather. The outlook for FY15 remains favourable, with management having previously indicated there's good bud growth. Moelis observes demand continues to rise, despite increases of more than 30% in the almond price over the the past year. The stock receives a Buy tick from the broker as, despite a 15% decline in the share price since the announcement of the harvesting problems, the multiples remain undemanding, given the company's position in the global almond market.

International almond industry dynamics are favourable, supported by a prolonged drought in California, which has over 80% of the world's supply. US shipments are up 4.3% year to date but the inventory carried over is 17% lower than at the end of last year.

Goldman Sachs has also downgraded yield as well as price assumptions, now expecting a crop of 12,200t and price of $8.20/kg. The company's previous guidance was for a FY14 crop of 12,600t at an average price of $8.30/kg. There is some upside risk of higher almond prices if the Californian crop falls short of the forecast 1.95bn pounds. Downside risk comes from Australia's climate, if Select Harvests' crop is further weakened by rainfall. The broker retains a Neutral rating, with Select Harvests trading on a FY15 forecast price earnings ratio of eight times. FY14 and FY15 earnings forecasts fall 10% and 4% respectively.

Goldman believes the stock is fair value. Given FY15 is regarded as a peak year for the cycle the broker expects earnings growth of 16.7% in FY15 but a contraction of 12.5% in FY16. The broker retains a target of $6.63, based on a 40% discount to the FY15 Small Industrials Index, reflecting the stock's inherent agricultural risk and the view that FY15 represents the peak in cyclical earnings. Moelis has a $6.75 target with forecasts for earnings growth of 10.7% in FY15 and a contraction of 8.7% in FY16.

 Select Harvests has a portfolio of orchards located in Victoria's Mallee, South Australia's Riverland and NSW's Riverina. 
 

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