Rising Input Costs And Weak Almond Demand Will Threaten Long Term Earnings Potential

Catalysts

About Select Harvests

Select Harvests is a large Australian almond grower and processor that integrates farming, processing and value added sales across global markets.

What are the underlying business or industry changes driving this perspective?

• Almond demand growth in key markets such as India and China remains strong, but an extended period of very favorable global pricing raises the risk that any future moderation in demand or substitution towards cheaper snacks will expose a structurally higher cost base and compress revenue growth and margins.
• Reliance on constrained bee supply and the evolving Varroa mite management regime in South Australia means any tightening in biosecurity rules or any shortfall in pollination capacity could cap yields just as capacity is lifted to 50,000 tonnes. This could limit volume driven earnings growth.
• Water, bees, fertilizer and electricity costs are expected to rise by around $20 million in 2026 and beyond. If PMO and efficiency programs fall short of fully offsetting these increases, unit production costs will structurally step up and erode net margins.
• The strategy to extract more kernel from hull piles and lift recovery rates is highly attractive at current almond prices. However, if the global almond cycle turns or prices plateau while recovery infrastructure is being scaled, the incremental tons could add complexity without a commensurate uplift in EBITDA.
• Expanding third party processing and direct customer relationships concentrates exposure to a relatively narrow healthy snacking and plant based food theme. Any slowdown in that category, or a shift in retailer buying patterns, could leave new capacity underutilized and dampen revenue and earnings leverage.

Assumptions

This narrative explores a more pessimistic perspective on Select Harvests compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Select Harvests's revenue will decrease by 2.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.0% today to 12.5% in 3 years time.
• The bearish analysts expect earnings to reach A$45.6 million (and earnings per share of A$0.32) by about December 2028, up from A$31.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$65.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 22.1x today. This future PE is greater than the current PE for the AU Food industry at 15.2x.
• The bearish analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global almond demand may fail to compound at 5% to 7% a year, or long term trends toward healthy and convenient foods and away from ultra processed snacks may weaken, which could put downward pressure on almond pricing and reduce revenue and earnings over time.
• Australia may lose its structural unit cost advantage versus United States producers, or Select Harvests may not be able to keep production costs flat in the face of industry wide inflation, which could compress net margins, especially if input costs such as water, bees and electricity rise.
• The company may be unable to continue broadening its value chain into processing and sales, sustain price premiums of around 2% to 2.4% or maintain direct customer relationships at about half of volumes, which could limit pricing power, make revenue more volatile and reduce EBITDA resilience through cycles.
• Operational initiatives such as Project Optimus, kernel recovery aimed at lifting yields by about 3% and the rollout of more efficient harvest shakers may not deliver the expected low cost, high return outcomes or quick paybacks, which could limit productivity gains and long term earnings.
• Financial discipline may weaken, net debt may not be reduced, the cost or tenure of bank facilities may deteriorate, or capital allocation may shift away from core gearing and high returning growth CapEx, which could increase balance sheet risk and reduce the scope for future dividends or buybacks, weakening the long term total return profile.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Select Harvests is A$4.3, which represents up to two standard deviations below the consensus price target of A$5.42. This valuation is based on what can be assumed as the expectations of Select Harvests's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.44, and the most bearish reporting a price target of just A$4.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$365.8 million, earnings will come to A$45.6 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of A$4.96, the analyst price target of A$4.3 is 15.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.