Select Harvest Limited Executive Summary

Company analysis & Market research
Company Details
Select Harvests Limited ACN: 000 721 380
Chairman: Michael Iwaniw MD: Paul Chambers 360 Settlement Rd Thomastown, VIC 3074 Tel: [phone] Fax: [phone]

Executive Summary

Select Harvest Limited is an Australian company listed on the Australian Securities Exchange. Its main business operations are the producing, manufacturing, distributing and marketing of almond products. The company has over 11 000 acres of its own orchards (either owned or leased) and manages a further 34 000 acres. The share price has experienced severe fluctuations over the past, from a high
of around $14 in 2005 to the current share price (as of 21/09/2012) of $1.14. The severe decline in the share price is due to numerous external factors, namely the impact of the high exchange rate on the price of exports and poor weather for growing crops. Despite results from the 2011 financial year showing a substantial loss, the overall industry outlook is a strong and positive one. Furthermore, Select Harvest is in a good position to benefit from industry wide growth along with their competitive advantages. Therefore, the final recommendation is to proposal Select Harvest as a valid and potential profitable investment to clients.

Question 1
Select Harvest Limited is a company that grows, manages and markets almonds. The company has 11 000 acres of its own almond orchards, which are both owned by the company or leased from others. The company is also involved in managing orchards owned by third parties, and is currently managing over 34 000 acres. Select Harvest also has a facility to sort, process and package goods for sale. Finally, the company is also involved in marketing almond products in an effort to increase consumption of its own almond products and increase sales.
Question 2
a. The chairman of Select Harvest is Michael Iwaniw. Iwaniw has served as chairman since November 2011 after joining the board in June earlier that year. Iwaniw’s career began as a chemist at the Australian Barley Board where he became managing director in 1989. Under his management it grew to be valued at $1.6 billion and was subsequently taken over by Canadian company Viterra. As well as being on the board of Select Harvest, Iwaniw has also served as a non-executive director on the boards of Toepfer International, New World Grain, Australian Bulk Alliance, 5-star flower Mill and Australian Grain Growers Cooperative.
b. Paul Thompson is the Managing Director and Chief Executive Officer. Prior to joining Select Harvest, Thompson was President of SCA Hygiene Australasia, a company with a turnover of more than $600 million. Another career achievement was the position of Director with the Food and Grocery Council and as a councillor in the Industry Group.
c. Select Harvest currently has sharers held by 3 359 investors.

Question 3

a. Market capitalisation = (Number of fully paid ordinary shares) x (Share Price).
= $1.14 x 56,812,699
= $64,766,477

b. PE multiple (based on full-year earnings for the latest full-year results reported)
PE = (Share Price) / (Earnings per Share)
= $1.14 / $0.337
= 3.38279

c. Dividend yield (based on the dividend for the latest full-year earnings reported)
Dividend yield = (Dividend per Share) / (Share Price)
= $0.08 / $1.14
= 7.0175%

d. The Bid-Ask spread (as of 26th September 2012)
= Ask price – Bid price
= $1.14 - $1.13
= $0.01

e. Enterprise value (EV)
= Market capitalization + Net debt
= Market capitalization + Interest bearing debt - cash
= $64,766,477 + $16,458,000 + $64,000,000 - $7,398,000
= $137,826,477

f. EV/EBIT multiple based on the latest set of full-year results
= Enterprise value / (Net profit before tax + Net interest expense)
= Enterprise value / (Net profit before tax + Interest paid – Interest received)
= $137,826,477 / ($19,223,000 + 3,774,000 - $385,000)
= $137,826,477 / $22,612,000
= 6.09528

g. EV/EBITDA multiple based on the latest set of full-year results
= Enterprise value / (EBIT + Depreciation expense + Amortisation expense)
= $137,826,477 / ($22,612,000 + $5,212,000)
= $137,826,477 / $27,824,000
= 4.95351

h. The P/NTA multiple based on latest full-year results, with price as of 21/09/2012
= Price / ([Net assets – Total intangible assets] / Number of shares)
= $1.14 / ([$168,815,000 - $46,961,000] / 56,812,699)
= $1.14 / $2.14484
= 0.53151

Question 4 Select Harvest | | | | | | | | | | | | | Days Inventory | -62 | -62 | -53 | -61 | -63 | -54 | -71 | -62 | -164 | -81 | -87 | -116 | Days A/c Recievable | 54 | 51 | 63 | 70 | 53 | 41 | 51 | 45 | 58 | 49 | 58 | 60 | Operating Cycle | -8 | -11 | 10 | 9 | -9 | -13 | -20 | -17 | -106 | -32 | -29 | -56 | Less: Days A/c Payble | -40 | -68 | -68 | -73 | -96 | -76 | -91 | -58 | -81 | -49 | -85 | -190 | Funding Gap | -32 | -57 | -78 | -82 | -87 | -62 | -72 | -41 | 25 | -17 | -55 | -134 | Cash Cycle | 32 | 57 | 78 | 82 | 87 | 62 | 72 | 41 | -25 | 17 | 55 | 134 | Funding Gap | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | PFG | NFG | NFG | NFG |

GrainCorp | | | | | | | | | | | | Days Inventory | -76 | -68 | -21 | -46 | -53 | -63 | -25 | -22 | -22 | -5 | -8 | Days A/c Recievable | 43 | 47 | 33 | 44 | 83 | 96 | 7 | 69 | 29 | 50 | 45 | Operating Cycle | -33 | -21 | 12 | -3 | 30 | 33 | -18 | 48 | 7 | 45 | 37 | Less: Days A/c Payble | -46 | -46 | -25 | -18 | -59 | -87 | -40 | -45 | -19 | -17 | -21 | Funding Gap | -13 | -24 | -36 | -16 | -89 | -120 | -22 | -93 | -26 | -62 | -58 | Cash Cycle | 13 | 24 | 36 | 16 | 89 | 120 | 22 | 93 | 26 | 62 | 58 | Funding Gap | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG |

Ruralco | | | | | | | | | | | | Days Inventory | -38 | -34 | -27 | -33 | -35 | -60 | -16 | -16 | -18 | -22 | -26 | Days A/c Recievable | 126 | 130 | 109 | 100 | 105 | 162 | 82 | 72 | 61 | 54 | 74 | Operating Cycle | 88 | 96 | 82 | 67 | 70 | 102 | 65 | 56 | 44 | 33 | 49 | Less: Days A/c Payble | -141 | -124 | -97 | -89 | -105 | -164 | -79 | -72 | -58 | -56 | -84 | Funding Gap | -229 | -220 | -179 | -156 | -175 | -266 | -144 | -128 | -101 | -89 | -133 |
Cash Cycle | 229 | 220 | 179 | 156 | 175 | 266 | 144 | 128 | 101 | 89 | 133 | Funding Gap | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG | NFG |

Select Harvest Ltd | - Working Capital | | Year | 2010 | 2011 | Days in year | 365 | 365 | | $000's | | Sales | 238,376 | 248,316 | COGS | 200651 | 220439 | A/c Receivable | 33,495 | 37,065 | Inventory | 34,152 | 37,618 | A/c Payable | 37,504 | 24,221 | | | | Days Inventory | 62 | 62 | Days A/c Recievable | 51 | 54 | Operating Cycle | 113 | 117 | Less: Days A/c Payble | 68 | 40 | Funding Gap | -45 | -77 | Cash Cycle | 45 | 77 | Funding Gap | NFG | NFG | GrainCorp - | Working Capital | | Year | 2010 | 2011 | Days in year | 365 | 365 | | $000's | | Sales/Revenue | 1,989,900 | 2,776,800 | COGS | 1,467,100 | 2,115,100 | A/c Receivable | 253,800 | 326,100 | Inventory | 348,100 | 526,600 | A/c Payable | 233,700 | 318,100 | | | | Days Inventory | 87 | 91 | Days A/c Recievable | 47 | 43 | Operating Cycle | 133 | 134 | Less: Days A/c Payble | 58 | 55 | Funding Gap | -75 | -79 | Cash Cycle | 75 | 79 | Funding Gap | NFG | NFG | Ruralco - | Working Capital | | Year | 2010 | 2011 | Days in year | 365 | 365
| | $000's | | Sale of Goods | 788,496 | 890,970 | COGS | 724,773 | 795,867 | A/c Receivable | 281,303 | 307,271 | Inventory | 67,770 | 83,503 | A/c Payable | 246,955 | 307,381 | | | | Days Inventory | 34 | 38 | Days A/c Recievable | 130 | 126 | Operating Cycle | 164 | 164 | Less: Days A/c Payble | 124 | 141 | Funding Gap | -40 | -23 | Cash Cycle | 40 | 23 | Funding Gap | NFG | NFG |

Question 5
The 10 year government bond rate RISK FREE is 3.26%.
The beta value used is 1.2 due to volatility in the share price of Select Harvests Ltd in recent months and looking further back over the past 8 or so years.
The market premium is 6%.

CAPM

Cost of capital = Rf + beta x (Km - Rf)
= 3.26% + 1.2 x (6% - 3.26%)
= 6.55%

The weighted average cost of capital (WACC) provides a calculation of a firms cost of capital where each category is weighted proportionately. Effectively, WACC allows us to measure the health of the company.

WACC = (E/(D+E) x Re + D/(D+E) x Rd x (1-t)

D = Net debt = $73,060,000
E = Market capitalization = $64,766,477
Rd = cost of debt = 7% pre tax t = corporate tax = 30%
Re = Cost of equity = Use CAPM formula= 6.55%

= (64766477/64766477+73060000) x 0.0655 + (73060000/73060000+64766477) x 0.07 x (1-0.3)
WACC = 5.68%

Question 6
The steep drop in earnings in the last financial year for Select Harvest of -21.13% resulted in difficulty in judging and forecasting future growth.
The estimate was finalised as r=5%, however the accuracy of this is compromised to some extent by volatility in Select Harvest.
Dividend growth is expected to decrease by a further 50% to $0.04 per share in 2013. This follows a decrease of 38.46% from 2011 to $0.08 per share in 2012. This estimated further reduction is due to the loss incurred in the latest financial year and the recovery time expected to overcome this. Post 2013, the expectation is that the company would be in a position to allow a higher dividend, increasing it to $0.06 per share, translating to a 33% growth in 2014.

Taking averages of dividends to form a flat line growth rate prediction:

2009: $0.2291
2010: $0.1909
2011: $0.14
2012: $0.10
2013: $0.04
2014:
$0.06

According to this prediction, the average dividend up to 2014 is $0.152. Admittedly this figure does not give a deep indication of the current state of the current situation.
In order to predict an appropriate growth rate, the calculation used was to take an average of the 2012 percentage change (-38.46%), predicted 2013 change (33%) and then to predict what the future change would be after that to bring the percentage growth rate down to a sustainable level. In order to do this, the prediction made was to reduce the percentage growth change by half for each year after 2013 until it reached 5% per annum. Therefore the calculation is

(-38.46 + 33 + 16.5 + 8.25 + 5 + 5 + 5 + 5 + 5 + 5)/10 = g = 4.929% since 2012.

D = $0.04

Stock Price = D (1+g) / (r-g)

= 0.04 (1 + 0.04929) / (0.05 - 0.04929) = $59.11492957746479

Question 7
In order to make a decision regarding investing in Select Harvest, the various calculations must be analysed. Looking at the price earnings multiple for example, the result of 3.38279 is relatively high, suggesting a higher earnings growth for the future. Similarly, there is also a high dividend yield result of 7.0175%, reflecting a decent return on investment in regards to the yearly dividend considering the current share price.

If you regard enterprise value as a more accurate reflection of the value of the company, then the result of $137,826,477 shows that it is by no means a small company. This may be of some reassurance to potential investors. This is also supported by subsequent ratios such as the EV to EBIT ratio of 6.09528, and the EV to EBITDA ratio of 4.95351. Both of which reflect positively on the company. However, ratios alone should not be relied upon solely, but rather, should be considered amongst other information, both internally and externally to the company.
Industry wide information is also useful in determining the worthiness of an investment in Select Harvest. According to a presentation made by Paul Thompson, managing director and CEO of Select Harvest, in September 2012, the almond industry looks set to experience increased growth in demand. Select Harvest predicts that global demand will increase by 10%, whilst Australian demand will increase by 8%. Specifically looking at Select Harvest, the company is in a good position to benefit from an increase in demand, this is because they supply to both local and global markets.

Looking to the supply side of the industry, while other company’s have reduced their rate of planting activity and consequently have older crops, Select Harvest has increased its rate of planting. This means that as other crops get older and less productive, Select Harvest crops are reaching their peak and producing at capacity. Additionally, in both 2010 and 2011, world wide demand was greater than world wide supply. This is despite the United States, which accounts for 86% of global production, having a record growing year.

Aside from demand and supply, another important factor to consider on an industry wide basis is price. For 2012, the price per kilogram has mostly hovered around A$5, which although not nearing the 2005 high of A$12, it is still a relatively good price. However, since export transactions are completed almost solely in US dollars, fluctuations in the exchange rate can impact heavily on income. For example, at the end of the last financial year, on June 29 2012, the exchange rate for US dollars was 1.0191. The high Australian dollar offsets the benefit of the price increase of almonds and therefore, if the exchange rate was to decrease, this would be beneficial to the income earned by Select Harvest and have a positive effect on profit. However, it should be noted that many analyst’s including the National Australia Bank financial markets sector, is predicting that the foreign exchange rate will drop below parity to 0.98 in June 2013, which would have negative impact on Select Harvest, although this is obviously subject to change.

Another advantage that Select Harvest has over international competitors, it that due to the location of the orchards in Australia, it is one of the few companies from the southern hemisphere that are able to supply fresh produce for the 6 months of the year during the harvesting season, whilst trees in the northern hemisphere lay dormant. This is of particular note due to the vast majority (86% in United States, 9% in Europe, 2% in Turkey and 1% in Chile) of producers, aside from those in Australia, being almost exclusively in the northern hemisphere.

Finally, also worth considering is the past performance of the share price. Share prices reached a peach in 2005 hitting around $14, to subsequently drop to the current price of $1.14. This may reflect a general lack of confidence from the market in this particular stock, or alternatively the current price may provide an opportunity to invest in the company while the shares are at a relative low, and potential to make substantial gains if the price were to recover and reach its previous averages.

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[ 1 ]. Select Harvest Limited, Board of Directors, 2012, online, accessed 22 September 2012, available .
[ 2 ]. Christopher Webb, ‘Chairman’s vote of confidence in the company he presides over’, The Sydney Morning Herald, 12 November 2011, online, available < http://www.smh.com.au/business/chairmans-vote-of-confidence-in-company-he-presides-over-20111111-1nbss.html>.
[ 3 ]. Select Harvest Limited, Board of Directors, 2012, online, accessed 22 September 2012, available .
[ 4 ]. Amrop Cordiner King, ‘Paul Thompson: Managing Director of Select Harvest’, June 2012, online, accessed 23 September 2012, available .
[ 5 ]. Select Harvest Limited, Annual Report, 2012, online, accessed 22 September 2012, available .
[ 6 ]. Ibid, 82.
[ 7 ]. Paul Thompson, Select Harvest Limited, Octa Phillip Agricultural Land Round Table, 26 September 2012, 2.
[ 8 ]. Ibid, 3.
[ 9 ]. Ibid.
[ 10 ]. Ibid, 18.
[ 11 ]. Ibid, 17.
[ 12 ]. Reserve Bank of Australia, Exchange Rate Data, Reserve Bank of Australia, 2012, online, accessed 23 September 2012, available .
[ 13 ]. National Australia Bank, Exchange rate forecast, National Australia Bank, online, accessed 23 September 2012, available .
[ 14 ]. Paul Thompson, Select Harvest Limited, Octa Phillip Agricultural Land Round Table, 26 September 2012, 17.