Couple of charts for you lovely, lovely people.
Firstly, a simple line chart of SHV (left axis) vs the AUD almond price/kg (right axis).
View attachment 160942
Pretty close fit right? In fact for those of you who understand the number, the correlation has an r-sq of 0.87
Secondly, a trace plot of SHV (y-axis) against almond prices (x-axis), with a linear regression line over 3 years
View attachment 160943
So given the current almond price of a smidge over A$7/kg, we're firmly in "expensive" territory - the regression has an output of $3.45 as a fair price for SHV at this almond price level.
Which is why Canaccord have downgraded today:
Cautious, as the almond price deteriorates...
We downgrade SHV's recommendation, price target and earnings forecasts after taking a more cautious
approach to our, and management's, almond price estimates.
Our short-term almond price forecast has been mark-to-market after observing a continued
deterioration in the indicative traded almond price. We estimate the almond price is current
trading -22% below SHV's recent guidance statement for its 2016 harvest (pooled price estimate
~A$9.00/kg versus current almond price of A$7.01/kg, Bloomberg, Figure 1).
Given the inherent operating leverage within SHV's business model, we expect investor sentiment to
wane as consensus and management revise their price estimates over the coming six months.
Incorporating the current almond price results in a significant revision to our earnings forecasts
in future periods (CGAu. est. 2016 pooled price of A
$7.50/kg, increasing at the inflation rate [2%] over the long term).
Earnings revisions: FY16, FY17, FY18 Cash EPS revised down by -5%, -40%, -35%. Our more cautious
stance over the short/medium term is driven by:
• Global almond prices deteriorating further, with the indicative spot price trading
materially below SHV's recent pooled price estimate of A$9.00/kg. Negative earnings
and dividend revisions will subsequently impact investor sentiment in the short term.
• Likely improvements in US yield/supply as the drought in California moderates. At its peak,
almond yields in the US averaged >2,500lb/acre (currently ~2,080lb/ac) illustrating a potential
+15% to +20% uplift to yield/supply as growing conditions normalise.
• The development of non-bearing acres in the US over the previous five years (~10% of bearing
acres, 150k ac) is also likely to increase almond production in future periods.
• The Almond Board of California recently released its position report for February, highlighting a
continued inventory build as it enters its critical sales period. The level of US almond supply
shipped by February stands at just 45% versus the five year average of 61% (total supply 2,221m lb,
total shipments 992m lb, figure 2).
• In Feb-16, SHV flagged a potential inventory build as commitment levels for its 2016 harvest were
below previous levels (16% in Feb-16 versus 30% in Feb-15).
We remain attracted to SHV's long-term opportunities, however caution the recent negative movements
in the almond price and its impact on consensus forecasts and investor sentiment over the medium
term.
SHV holds a strategically relevant asset, possesses a strong balance sheet position, with an
improving yield and production profile (14.5k in FY15 increasing to 20k in FY22) and has the
opportunity to vertically integrate its business over the coming years.
The strength in SHV's balance sheet (leverage ratio ~1.5x) facilitates earnings accretive
acquisitions through the cycle. However we await a stabilisation in the almond price before
becoming positive on the stock. Following our earnings revisions, we downgrade to HOLD (from Buy)
and our PT to $4.72 (was $6.66) (DCF: 8.5% WACC, no TGR).
I wonder if management's guidance will survive the imminent site visit?
