Australia | Nov 30 2021
This story features SELECT HARVESTS LIMITED. For more info SHARE ANALYSIS: SHV
While a recent fall in almond prices prompts brokers to lower earnings forecasts for Select Harvests, the medium-term expectation is for a rebound in prices.
-Select Harvests FY21 result beat consensus earnings estimates by 25%
-Scope for an almond price recovery
-Causes of the recent softness in pricing
By Mark Woodruff
Easing almond prices have ensured a fall in broker earnings forecasts for Select Harvests ((SHV)), and the key variable for FY22 results is likely to be the effect of the drought in California upon the Australian dollar almond price.
The company is an integrated grower, processor and marketer of almonds that owns and operates farming and processing assets in Australia.
FY21 results delivered a 25% beat to FY21 consensus earnings (EBITDA) estimates, driven by a rising almond price in the second half on top of a favourable product mix, according to UBS.
Despite these positives, the market focused upon the fall in almond prices to the current $6.75-7.25/kg from $7.25-7.75/kg as at 31 August.
UBS prefers to focus attention on the medium term, expecting a recovery in prices predicated on a severe drought in California, combined with healthy underlying demand. Moreover, industry feedback suggests further downside risk to pricing is relatively limited.
While the broker retains its Buy rating, it also acknowledges near-term uncertainty and lowers its target price to $8.60 from $9.50.
Citi also retains its Buy rating and believes there is scope to benefit from an almond price recovery. Citi's optimism is based on company management’s expectation that market pricing will improve before a commitment is made to sales of the 2022 crop. Forward sales, which typically begin in November, may be deferred until harvest in February 2022.
The broker also feels the current almond price weakness is transitory and points to early signs of reviving export demand and a continuation of the Californian drought.
Citi also notes the potential for softer pricing to impact early commitments and lowers its forecast FY22 average almond price. As a result, FY22 and FY23 earnings forecasts have been reduced and Citi's target price falls to $9 from $9.85. The reduction also reflects a higher capital expenditure outlook.
Causes of the recent softness in pricing
Almond pricing has softened through the back half of October and November 2021 to levels similar to late July 2021.
Citi attributes weaker prices to a range of factors including well-stocked buyers in Western Europe that have hoarded the cheaper US 2020 crop, which was purchased early to avoid shipment delays. This is evidenced by a -25% year-to-date fall in shipments to Western Europe.
Moreover, the broker cites industry sources that explain 20% of almond sales have been aborted due to the flow on effects from a distorted sea freight supply chain. This incorporates high ocean carrier rates and unreasonable demurrage and detention charges.
On top of this, sellers have been cautious over drought concerns and a belief that the current price fall will correct, explains Citi.
Looking forward, the broker assumes an Australian dollar hedge rate of $0.73 (the company has locked in around 50% of its export hedging needs) and a price premium of circa 6%. This implies a US almond export price -5% below FY19 levels.
Citi lowers its forecast to $7.50/kg in FY22 from $8.10/kg, and to $8.50/kg in FY23 from $8.80/kg, before estimating a peak of $9.30/kg in FY24. However, the broker still notes the potential for FY15 peak pricing of $11.45/kg to return or be exceeded.
Finally, FY21 earnings from continuing operations marked a miss versus Bell Potter’s estimates. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains its Hold rating and lowers its target price to $7.60 from $8.50. The move reflects the removal of a prior 10% premium, as spot almond prices are trading below the analyst’s FY22 estimate.
According to Bell Potter, the Australian dollar almond price will be largely dependent on the California snow pack formation in January to April of 2022.
Wilsons, equally not included in the seven stockbrokers monitored daily, retains an Overweight rating with a price target of $8.75. Wilsons anticipates the global almond market will likely remain "unstable" in the short term, but tight supply should drive a favourable almond price environment over the next 1-2 years.
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