Friday, May 13, 2016

Select Harvests and the Almond Boom and Bust

SHV is the second largest almond producer in Australia, behind the well diversified Olam. SHV is the only pure play almond stock I know of. The company is vertically integrated - it owns almond orchards, not just processing plants - and sells both domestically as well as export.

Almond prices have crashed over the past few months and SHV’s stock price went the same direction. Earnings will probably be way down this year.

A bullish story for Australian producers emerges once you look past the recent boom and bust of almond prices. Global demand for almonds continues to increase over time, driven by health trends. California supplies the majority of the world’s almonds, but it faces structural difficulties from drought and water shortage. Australia is the second largest producer and is in position to take more market share. Australian producers also have geographic advantage in terms of being closer to key growth markets of India and China.

I think almond prices are probably at or near a trough. The current price of $2.3/lb in California is already near break even. According to this presentation (see slide 43), growers need $2.15/lb to break even and $2.5/lb to insure a minimal profit. Longer term, stabilizing California supplies should put a floor on global prices.

Select Harvest will enjoy a natural production ramp in a few years (think like ~2019) as trees age and reach production sweet spots. Between higher normalized price and higher production, I can see earnings stabilizing.

The risk is California productivity. Yield per acre have consistently went up over the past decade. It is conceivable that Californian farmers can find a way to cut down water usage while keeping up production, so supply may actually not be constrained for years.

To be conservative I assume prices of USD 2.25-2.75/lb and fully ramped production of 19,000 tons. This would correspond to earnings of A$0.2 to 0.5 per share for SHV. The stock had a nice run during my research and it is now at A$5.4-5.5/share. I’m waiting for a pull back toward $5 or below to pull the trigger.

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