Despite the NSW floods almond harvest volumes at Select Harvests are unchanged, although softer prices have driven a reduction in earnings forecasts

-Exchange rates detracting from a firming almond price
-Positive outlook for almond prices beyond FY21
-Attractive outlook for production growth
 

Almond pricing over 2021 has been softer for Select Harvests ((SHV)), which has driven a reduction in broker earnings forecasts. Despite disruptions in NSW, the company's outlook for harvest volumes is unchanged.

Wilsons was encouraged by the trading update, as the impact from floods across NSW is modest and production costs are broadly consistent with expectations. The NSW orchards account for around 21% of total harvest area along with a lower share of production.

Select Harvests has confirmed 50% of its crop has been harvested, with favourable conditions across South Australia and Victoria. Despite the rain in NSW, the harvest of the more sensitive nonpareil variety had been achieved.

Crop volume forecasts of more than 27,700t are confirmed and more than 10% of the delivered crop has been processed. While the company has guided to flat costs for growing and processing, harvest costs will ultimately depend on the degree of drying required from the rain-affected portion of the crop.

Orders for 20% of the forecast crop are currently sitting at $6.60/kg compared with $6.70/kg in February and the company, Citi suspects, is no longer anticipating a firming in prices for the current season. Exchange rates are also detracting from a firming almond price, with 70% of the crop now hedged at US$0.73 having previously been 50% hedged at US$0.72.

As a result, the broker reduces FY21 average almond price forecasts to $6.30/kg, noting higher-grade nuts are typically sold earlier. Yet Wilsons assumes almond prices improve around 9% from current levels for FY21.

In Bell Potter's view, pricing, crop size and costs imply FY21 operating earnings (EBITDA) of $14-28m and a net loss in FY21 of -$700,000. Considering the current conditions, the broker downgrades net profit estimates by -21% for FY22 and -2% for FY23.

As the almond pricing cycle is at a historically low level, Bell Potter reduces the discount rate to 8.0% from 9.5%, effectively countering the material downgrades to estimates, which lifts the target to $6.00 from $5.70. A Hold rating is maintained as the broker does not envisage a compelling value proposition at current levels.

Citi remains constructive regarding almond prices beyond FY21 and has a Buy rating with a $6.50 target. The broker continues to believe the stock is attractive at this point in the almond price cycle and net profit should grow at 40% compound out to FY23.

This will be driven by a rebound in almond prices on lower Californian supply and the acquisition of the high-yielding Piangil orchard as well as a normalisation of water costs. The industry expects a small US crop this year and initial 2021 US crop prices are up, with the potential to move higher dependent on any carryover in volume from 2020.

Wilsons remains attracted to the earnings upside associated with further production growth at Select Harvests and a full recovery in the almond price, although warns the timing and trajectory of a recovery is likely to influence the share price from here on. The broker continues to assess the risk/reward is biased to the upside and retains an Overweight rating with a $6.67 target.

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