Carina West Expansion Will Increase Processing Capacity To 40,000 Tonnes

Key Takeaways

• Strengthened balance sheet and strategic investments could improve net margins and reduce interest expenses amid cost management initiatives.
  
• Anticipated almond price increases and expanded processing capacity may boost revenues and enable greater economies of scale.
  
• Ongoing yield challenges, rising interest expenses, and weather dependencies threaten profitability, while transformation efforts carry execution risks amid persistent logistics disruptions.

Catalysts

Engages in the growing, processing, packaging, and selling of almonds and its by-products in Australia.

• The recent capital raise has significantly strengthened Select Harvests' balance sheet, reducing the company's gearing from 46% to 29%, and further improving it to 19% with the recent cash receipts, which is likely to lower interest expenses and enhance future net margins.
  
• The company anticipates an increase in almond prices due to a better global supply/demand balance and reduced defect rates in the U.S., which could significantly increase revenue given the company's production volume.
  
• Select Harvests is investing in the expansion of its Carina West processing facility, aiming to increase its capacity to 40,000 tonnes, allowing for greater economies of scale and thereby potentially improving net margins.
  
• The ongoing Project Management Office initiatives have resulted in $32 million in profit generation, with strategic projects aimed at cost reduction and process improvements expected to hold costs flat despite inflationary pressures, positively impacting net margins.
  
• The execution of a water rebalancing strategy is anticipated to optimize water costs and long-term profit outcomes, potentially improving net margins as water investments align closer with their farming requirements.

Select Harvests Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Select Harvests's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 11.8% in 3 years time.
• Analysts expect earnings to reach A$49.1 million (and earnings per share of A$0.35) by about April 2028, up from A$1.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$71.3 million in earnings, and the most bearish expecting A$27.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, down from 475.6x today. This future PE is lower than the current PE for the AU Food industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Select Harvests Future Earnings Per Share Growth

Risks

• There is a risk of further impairments if yields on the Yilgah and Mooral farms continue to underperform, which could negatively impact net margins and future earnings.
  
• Increased interest expenses due to higher interest rates and an elevated net debt profile could affect net profits, potentially limiting the financial benefits from revenue growth.
  
• Outstanding logistics issues, despite progress, have previously caused significant delays in cash inflows, which may continue to disrupt cash flow and liquidity.
  
• The reliance on favorable weather conditions in New South Wales for yield recovery introduces uncertainty in revenue, as adverse weather could lower crop outputs.
  
• The company's transformation initiatives, although yielding positive results, carry execution risks; any failure to achieve projected cost reductions or yield improvements could adversely impact net margins and profitability.

Valuation

• The analysts have a consensus price target of A$5.115 for Select Harvests based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$5.85, and the most bearish reporting a price target of just A$3.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$417.3 million, earnings will come to A$49.1 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of A$5.02, the analyst price target of A$5.11 is 1.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.