Select Harvests Limited

Company Overview: Select Harvests Limited (ASX: SHV) is engaged in the processing & trading of almonds, leases, and manages several orchards. It has several brands under its portfolio, which include Lucky, Sunsol, Soland, NuVitality, Renshaw & Allinga Farms, to name a few. It is one of the key players from Australia to export its almonds in the international and domestic markets.

SHV Details

Increasing Global Demand Fuelling Rise in Production Volumes: The company has a strong presence across the retail and industrial markets and has established routes to the market in Asia, Europe, and the Middle East. It has a portfolio of over 9,262 hectares of owned and leased almond orchards, with a presence in Victoria, South Australia and New South Wales. The Group has witnessed increased traction in demand for its in-shell, kernel, and value-added product, and in this regard, it has the manufacturing capability to process above 30,000MT of almonds in the company’s state-of-the-art Carina West processing facility.

Market Update:

• As per an update provided on 30 August 2021, the company has informed that 80% of the crop has been processed. It expects crop volume (including the crop from the acquisition of the Piangil Almond Orchard) to be ~28,250MT in 2021, compared to crop volume of 23,250MT in 2020.
• SHV has reported an increase in the market pricing by $0.50/kg to $7.25/kg - $7.75/kg since its previous update in July 2021.
• 70% of the Group’s crop is committed at prices in the range of $6.25/kg - $6.75/kg, and 90% of the crop is covered at the exchange rate of 0.73AUD/USD.
• As part of its restructuring initiative in the Food Division, SHV has signed agreements to sell its Lucky and Sunsol brands to Prolife Foods Pty Ltd for $1.5 million along with finished goods inventory.

Revenue Trend (Source: Analysis by Kalkine Group)

Sustainable Co-Waste Projects:

The company is focused on revenue diversification with an eye on sustainability. In this regard, it is undertaking three co-waste projects.

• Composting: The Group uses the waste ash by-product generated by H2E Co-Generation Power Station, along with waste skins and other organic matter to recycle and provide potassium to the almond orchards. In 2020/2021 it produced 30,000 MT of compost for use within the company’s orchards.
• Nutritional Fertiliser: The company developed a process to convert waste ash into high-grade carbon-based liquid and solid fertilisers. It has also received a grant of $190,000 to scale up the process.
• Liquid Fertiliser: It has also developed an innovative way to digest almond hull and olive pit waste with urea to produce liquid and solid fertilisers.

Top 10 Shareholders: The top 10 shareholders together form around 39.38% of the total shareholding, while the top 4 constitute the maximum holding. Perpetual Investment Management Limited and Yarra Funds Management Limited are holding a maximum stake in the company at 10.33% and 7.89%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improvement in liquidity, with the current ratio at 2.44x in H1FY21, compared to 2.14x in H1FY20. There has also been an improvement in the cash cycle to 422.2 days in H1FY21, from a level of 835.1 days in the previous corresponding period. The group has reported a total debt of ~$372 million as of 31 March 2021, with long term debt of ~$322 million and short-term debt of ~$50 million.

Liquidity & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Logistics Risk: The Group is prone to logistics risks and its operations have been impacted by shipping disruption to the markets of India & China.
• Climate Risk: The Group’s production & export volumes are dependent on favourable climatic conditions and access to sufficient water resources.
• Macro Risk: Its business is also exposed to macro factors like COVID-19 impact, labour shortages, Government intervention, to name a few.

Outlook: The global almond market has been valued at US$8.6 billion in 2020/21. The prospects of the company seem to be positive in the global stage with Australia doubling its almond production in the last decade. The Group’s crop for 2022 has been progressing well with decent health of trees in all the regions. It has witnessed pollination peak in mid-August and had also reported decent bee flight hours. With favourable water market conditions and strong seasonal allocations, the 2022 theoretical crop volume stands at 29,595 MT.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of SHV is trading below its 52-weeks’ average levels of $4.910-$8.980. The stock of SHV gave a positive return of ~9.78% in the past six months and a negative return of ~14.43% in the past one month. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average multiple, considering the volatility in product prices in the sector, shipment delays and inherent macro risks. For the purpose of valuation, few peers like Costa Group Holdings Ltd (ASX: CGC), Australian Agricultural Company Ltd (ASX: AAC), Murray Cod Australia Ltd (ASX: MCA) have been considered. Considering the expected upside in valuation & current trading levels, optimistic long-term outlook with decent demand for almonds, favourable production estimates, revenue diversification from sustainable projects and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $6.75, down by 1.604% as on 22 November 2021.

SHV Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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