Should You Buy Select Harvests?

The economic downturn has put pressure on many Australian sectors. This year has been one of the worst starts for the ASX 200. Investors are pulling their money out left, right and centre. The risk just doesn’t seem worth it. However, there is one sector in Australia that has been particularly sheltered from the market mayhem.

Australian agriculture businesses were a standout last year, but they seem to be dropping off in 2016. Was it just a phase? I don’t think so.

Select Harvests [ASX:SHV] is Australia’s biggest nut and health food company. Select Harvests’ shares have done little but decline this year. Share prices have dropped 37% this year alone. A major reason behind the decline was due to big investors jumping ship.

A logical explanation for the decline was sellers trying to crystallise profits. Select’s share price rose from $5 to $13 per share in the space of a year. Big banks led the selloffs.

Is Select Harvest being oversold?

Today, Select announced their first-half FY16 results, reporting that NPAT skyrocketed 41% over first-half FY15. NPAT of $23.9 million can be largely attributed to Select’s almond division. However, it was their food division that was the biggest improver, up 64%.

Select was also able to increase operating cash flows by an amazing 339% to $80.8 million. And, as Warren Buffett is always quoted as saying, cash is king.

Select’s managing director Paul Thompson said:

Our strategy remains focused on delivering significant operating cash flows, implementing the investment in our growth, maintaining a prudent balance sheet, plus payment of healthy dividends.

Interim dividends were 40% healthier than last year, and are now up to 21 cents per share. Yet they were missing a condition that most Australian dividends have. Select decided to pay their dividends unfranked.

In Australia, companies are able to ‘frank’ their dividends. This basically means that dividends don’t get taxed twice (first by the company, and then the shareholder). Unfranked dividends are the opposite. Shareholders will have to pay tax on their dividends if they are unfranked.

This whole situation might dampen Select’s stellar results, yet it doesn’t seem to be fazing investors. Shares have traded up almost 5%, hitting a high this morning of $5.55 per share. However, it’s still a long way to go before Select is able to reverse their share price losses for 2016.

But this is actually a benefit of getting into a company like Select. If prices do bounce back, then your returns are only going to be that much higher.

Almond crop estimates are expected to decrease by 5% for 2016. However, current weather forecasts are looking very promising over the harvest period.

Select will continue to consolidate on their newly acquired orchard in NSW, while developing their existing orchards. Thompson notes:

The productivity of our orchards is improving, the Food Division profitability continues to increase and the two major cost-out projects are on track. Most importantly, the company is investing in additional capacity to grow tits future earnings base. We have restructured the business over the last few years to profit and grow in all environments, throughout the cycle.

Select’s success is dependent on many things. The price of almonds, the weather and almond production will all affect the company going forward. Whether their share price continues to drop in 2016 is anyone’s guess. However, the company seems well equipped to grow within an expanding agricultural market.

Härje Ronngard,

Junior Analyst, Money Morning

PS: The Australian market is still down for the year. Amid all the pessimism, it’s becoming harder to pick winners. Staying on top of market news can also be tiresome. As soon as you think you’re up to date, something new gets reported. Some people just don’t have the time or knowledge to analyse every company in detail.

Thankfully, Money Morning’s Kris Sayce is here to help. Kris has written a report, ‘The Five Best ASX Stocks for 2016’, to point investors in the right direction. In Kris’ report you’ll learn why retailers are set for a revival. He also lets you in on a sneaky way to play the Australian property market.

If you want to find out the above and more, pick up Kris’ report today. To get your free copy, click here.

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