Small Caps | Jun 23 2015
-Poised to increase share
-Large increase in dividend
-Record of innovation
By Eva Brocklehurst
FY16 could be even better for Capilano Honey ((CZZ)). The company has retained its strong market share, with domestic honey supply relatively constrained in the second half.
Canaccord Genuity believes the second half result could surpass the record witnessed in the first half. The broker upgrades earnings per share estimates for FY15 and FY16 by 13.2% and 19.4% respectively. Valuation is rolled forward and the target is lifted to $14.00 with a Buy rating in place. The stock continues to trade at undemanding multiples and offers an attractive yield, recently announcing a 37.5c full year dividend. This compares with the 20c paid in FY14.
Capilano's supply is likely to be up 10% in FY15 and with the acquisition of Chandlers in February, the company's share of domestic supply is likely to increase to between 62-65%. Canaccord Genuity continues to rate the stock based on its strategy of adding higher value products – such as manuka honey – and export market opportunities – increasing supply to China. The balance sheet is lightly geared which means the company can continue to bolt on acquisitions. This also makes it an attractive target for other food companies.
Capilano augments its domestic supply with imported product and imported volumes are expected to grow to 5,000 tonnes in FY15, up 20% on FY14. With domestic supply not coming back in significant volume, competition in the private label segment has been subdued. This is the segment of the market that is the main competition for Capilano's blended honey brand, Allowrie.
In FY16, assuming the company retains its grocery market share of 74% seen in the second half, there should be substantial revenue growth. Canaccord Genuity assumes 2.5% growth in domestic market demand and no growth in exports and on-grocery channels, which potentially renders the estimates conservative. Morgans recently initiated coverage on Capilano Honey with an Add rating and $12.30 target, noting the stock's attractive price when compared to its growth profile. Moreover, the broker hails the company's track record of innovation. Capilano exports to over 32 countries and is the largest packer and marketer of honey in Australia.
Demand for honey is increasing globally, as marketers capitalise on medicinal properties. Specialist honeys sell for substantially more than the basic product. Morgans notes honey is the only growth category in the "spreads" category on supermarket shelves. Honey demand is growing at around 5.0% per annum. There is also strong demand from Asia for Australian honey.
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