Select Harvests’ Profit To Peak In FY15

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

-Volume decline but price up
-No end to Californian drought
-FY15 could be peak year for earnings
 

By Eva Brocklehurst

Almond producer Select Harvests ((SHV)) has now harvested 80% of the 2014 crop, with an average 20% volume decline on 2013 largely attributable to wet weather and related insect damage. Victoria and SA crops are down 10% and NSW down 27%. Underlying profit in FY14 is expected to be better than FY13's $22.9m, but the company has not signalled to what extent.

In Select Harvests' favour is the fact that the Californian drought shows no signs of easing. The region supplies 80% of the world's almonds and expects a further 2.5% decline in 2014, with significant risks for 2015. The company expects to harvest 10,500 tonnes in 2014 compared with 12,600 tonnes in 2013, offset by an increase in the average price for the 2014 crop to $8.40/kg from $8.30/kg, despite the quality issues. The prospects for 2015 are also favourable, with good bud growth and local and export demand remaining strong.

Moelis has downgraded earnings estimates for FY14 by 10%, largely as the tonnage is lower and offset only somewhat by the average price increase for the season. The broker retains a Buy rating and $6.20 target. A strong earnings rebound in FY15 is expected, in the absence of a repeat of the adverse weather conditions. This should position the company for a positive FY16 outlook as well, with the broker forecasting profit of around $32m compared with $35m in FY15.

Bell Potter cuts FY14 profit forecasts by 20% and believes FY15 will be the cyclical peak for Select Harvests. The broker is mindful that yields have taken a hit in 2014 and price increases are not mitigating the lower volumes. Assuming a return to theoretical yield level and spot prices at $8.17/kg the broker expects a material 30% uplift to FY15 profit, largely reflecting the broker's sharper downgrade to FY14. Bell Potter has downgraded estimates for FY15 and FY16 by 6.5% and 7.1% respectively, to reflect more conservative yield assumptions, and expects FY16 profit to now fall to $21.4m, from around $33.5m in FY15. The largest risk lies in pricing assumptions, in the broker's opinion, with US dollar almond prices at all-time highs and every 1% fall in US dollar prices resulting in a 20% fall in Select Harvests' profit.

Bell Potter is typically a buyer of agricultural stocks when they disappoint, as there is generally a response in the share price that re-prices theoretical earnings after the event. Select Harvest appears to be at the end of a two-year upgrade cycle and, with prices so high and yields expected to return to their peak, the broker struggles to find the next positive earnings catalyst. Hence, a Hold rating is retained. The target is reduced to $5.21 from $5.45.

Goldman Sachs is of a similar view, believing FY15 will be the peak in earnings for the cycle. The broker downgrades crop yield and price assumptions for FY14 by 20%, but makes smaller changes (around 2%) to the outer years, given the source of the downgrade relates to FY15 crop issues rather than long-term factors such as the almond price or Australian dollar. The broker estimates profit of around $38.8m for FY15 and $34m in FY16. Goldman Sachs retains a price target of $6.11, based on a 40% price/earnings discount to the FY15 Small Industrials, to reflect the inherent agricultural risk. A Neutral rating is retained.

See also, Rain Dampens Select Harvests' Outlook on May 15 2014.
 

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