Sweet Success For Capilano

-Diversifying sources
-Focus on higher-value end
-Maintains retail price, margin
 

By Eva Brocklehurst

Capilano Honey ((CZZ)) has made inroads into market share, with a 27% increase in revenue and profit in the four months to October already exceeding the first half of FY14. The company’s dominant market share and diversified supply chain is expected to underpin FY15 earnings, as it expands its range of brands and improves its debt position.

Canaccord Genuity’s earnings outlook for the stock in FY15 has been upgraded by 20.3% on the back of positive AGM commentary. Canaccord’s price target is increased by 15.3% to $8.79′ suggesting the potential for 31% upside. Needless to say, a Buy rating is in place. Capilano has indicated its market share has jumped to 67.8% from 55.2% a year ago. This gain has been at the expense of competitors, including private labels, which have dropped market share to 14.0% from 19.8%.

While a supply shortage means the company may not retain all the recently acquired share, the broker considers a structural change has occurred and Capilano is more strongly positioned, and able to provide continuity of supply. Dry conditions in NSW and Queensland may constrain a full rebound in Australian honey volumes over the next few months but the company has been able to source honey from overseas, supplementing domestic honey with blends.

The company is pursuing its premium product categories, such as manuka honey, and looking to increase premium exports to China for which there is strong demand. Brands such as Allowrie and Smiths have been expanded to maintain a key presence on supermarket shelves. Growth is being reinforced by higher margins associated with higher-value branded honey, supplemented by the blended products.

FY14 was a challenging year for Australia’s honey industry but Capilano has been able to push through honey price increases at a retail level and maintain margins. Canaccord Genuity is forecasting profit growth of 52.0% in FY15, reducing it to growth of 13.1% for FY16 forecasts. Although a resumption of supply will enable competitors to reclaim some market share, the broker believes the company’s ability to offer bee keepers market-leading prices for honey, as well as provide support to the industry via technical advice and an on-the-ground presence, will position Capilano favourably in competition with private label producers. 

Key risks include adverse changes to trading terms by the two major supermarkets, including discounting which leads to margin reduction. Honey production is also very affected by agricultural factors, such as weather, bushfires and poor pollination, which reduces supply. Capilano is the largest packer and marketer of honey in Australia, having grown from an original co-operative. The company derives 75% of its revenue from Australia with 25% from exports.
 

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