Australia’s food stocks don’t always move ahead in a straight line – sometimes, the weather doesn’t co-operate. Today, I’m looking at two first-class agribusinesses, with global reach, but both of which haven’t enjoyed the three years of the La Nina climatic pattern, which has brought cooler, wetter growing conditions to their southern Australian growing bases. But there is good value in both, with a more favourable El Nino pattern on the way.
- Cobram Estate Olives (CBO, $1.255)
Market capitalisation: $522 million
12-month total return: –12.5%
Three-year total return: n/a
Estimated FY24 (June) yield: 2.6%, 70% franked (grossed-up, 3.4%)
Analysts’ consensus price target: $1.63 (Stock Doctor/Refinitiv, four analysts), $1.645 (FN Arena, two analysts)
Established in 1998, Cobram Estate Olives listed on the ASX in August 2021 in a “compliance listing,” in which a privately-owned company moves its shares onto the ASX without raising capital. The shares first traded at $1.90, but after a peak of $2.10, it has been a tough time for the stock.
However, in the horticulture world, Cobram Estate has done a great job. It is Australia’s largest olive farmer, with more than 2.4 million olive trees planted on 6,584 hectares of freehold farmland and produced an estimated 72% of Australia’s total olive crop in 2022. CBO is a vertically integrated producer and marketer of olive oil products, with operations in Australia and USA and export customers in 17 counties. The company owns a portfolio of premium olive oil brands, including Cobram Estate and Red Island, with a combined market share of 49% of extra virgin olive oil sales by value in Australian supermarkets in financial year 2021-22.
In the USA, the company owns 207,500 olive trees, planted on 358 hectares of owned and leased land in California. CBO also owns three olive mills (two in Australia and one in the USA) with more than 144 tonnes per hour of combined olive milling capacity, enabling the company to control the milling of every olive it grows. Cobram Estate is number 10 in the US national olive oil market (it is the second-largest Californian olive oil brand in the US.) The US market is nine times bigger than Australia’s, so there is plenty of scope for Cobram Estate to build its business there – in fact, it could become the long-term driver of the company’s returns.
The company’s large-scale olive groves and olive mills are some of the largest in the world, enabling CBO to achieve efficiencies in olive growing, processing, and marketing. CBO’s proprietary growing system, Oliv.iQ, allows it to grow more olives per tree, accumulate more oil in those olives, and extract more olive oil out of the olives at a higher quality and lower cost of production than the next best growers in the world (according to a 2019 report from the University of California at Davis), while using less water and less fertiliser.
To complete its integrated operations, CBO also owns Australia’s largest olive tree nursery, two bottling and storage facilities, 18.4 million litres of olive oil storage capacity, and one of the world’s leading olive research, development, and testing laboratories – Modern Olives – with labs in Australia and the USA.
Olive trees naturally bear fruit in two-year cycles, with a lower-yielding crop one year (for example, in FY22) followed by a higher-yielding crop the next (e.g., FY23). This is a known and expected two-year cycle that CBO easily manages operationally and logistically. It means that FY22 should be compared with the previous lower-yielding crop year, FY20: the 2022 Australian harvest produced 9.5 million litres of olive oil, a 52% improvement on the previous lower-yielding crop year in 2020, which was a 6.2 million litre crop.
In June, the company said it expected the combined harvest from its Australian olive groves would produce between 12.6 million and 13.2 million litres of olive oil, about 25% below earlier expectations. But in July, however, Cobram Estate said final production came in at 12.5 million litres.
Given that 2023 is a higher-yielding crop year, full-year earnings for CBO are expected to be materially higher than FY22. Cash flow from operations is also expected to be materially higher in the second half due to substantial second- half sales growth in the USA. Analysts expect earnings per share (EPS) to surge into the black, from a loss per share of 0.17 cents in FY22 to EPS of 6.1 cents in FY23 – but to recede to 1.6 cents a share in FY24, on a lower-yielding crop year.
But there are several strong dynamics at work in the CBO business. The company continues its transition from bulk producer to producing under its own brands, which should benefit margins in the long term. Also, its planting activity will increase its orchard asset base significantly: the company expects its mature groves in Australia to increase from 4,000 hectares to 7,000 hectares over the next decade. Currently, 59% of CBO’s Australian groves are mature, 28% immature, and 13% not yet productive. Much of the company’s US orchards are not yet mature, either.
Broker Bell Potter has been reviewing Cobram Estate Olives following the $1.6 billion offer for Costa Group by New York private equity firm Paine Schwartz and says, “many of the same traits are present,” such as a seasonally depressed yield pushing the share price towards the underlying value of the agricultural assets, implying little value included for the brands. “Yet this is a portfolio of assets which are yet to reach economic maturity and the current share price,” says the broker: it thinks the current valuation on CBO ignores the uplift in asset values likely to accrue by FY30.
- Select Harvests (SHV, $4.39)
Market capitalisation: $531 million
12-month total return: –12.5%
Three-year total return: –7.6% a year
Estimated FY24 (September) yield: 1.7% fully franked (grossed-up, 2.4%)
Analysts’ consensus price target: $5.50 (Stock Doctor/Refinitiv, five analysts), $5.50 (FN Arena, two analysts)
The vertically integrated Select Harvests is one of the world’s largest almond growers, supplying the industrial food markets globally – the company exports almonds and value-added food products to China, India, the rest of Asia, Europe and the Middle East, with about 80% of production exported. China and India account for almost two-thirds of export sales.
The company has a geographically diverse almond orchard portfolio covering 9,262 hectares, in the states of New South Wales, Victoria and South Australia. These orchards, plus other independent orchards, supply its state-of-the-art processing facility at Robinvale, Victoria. This facility can process more than 30,000 tonnes of almonds in the peak season and can meet the ever-increasing demand for inshell, kernel and value-added products. The company’s industrial almond business supplies a full range of premium value-added almond products to more than 600 food-industry customers globally.
Select Harvests has blamed the La Nina conditions for producing poor crops in 2022 and 2023 that caused a write-off of goodwill, driving a $100 million plunge from profit to loss in the first half of the financial year.
In May, the company reported an interim net loss of $96.2 million, compared to a profit of $2 million in the previous first-half, on the back of an 11.4% fall in revenue, to $60.9 million. The interim dividend was cancelled.
La Nina has played havoc with Select’s crop volumes. In 2023, the estimated crop of 30,000 tonnes decreased to 17,500 million tonnes; and the net realisable value of the crop is less than the total costs to sell the crop. The company decided to reflect the full loss of the 2023 crop in the first-half accounts.
The company says early indications are that the 2024 crop is on track to return to normal yields. Following three years of the wet La Nina weather patterns, the Bureau of Meteorology has forecast that Australia is likely to move into the El Nino pattern, which is typically favourable for growing almonds.
The vertically integrated Select Harvests is one of the world’s largest almond growers, supplying the industrial food markets globally – the company exports almonds and value-added food products to China, India, the rest of Asia, Europe and the Middle East, with about 80% of production exported. China and India account for 63% of export sales.
The US (mainly California) dominates the global almond production industry, with 79% of the market, but Australia slots in at second, with 8%, and a great position as a counter-seasonal supplier to the northern hemisphere. But Californian almond pricing dominates the market.
The 2023 US crop is likely to be reduced – El Nino is not good for it – and with recent US shipments bringing down inventories, and strong demand from the key export markets China and India, the outlook is good for almond price increases.
Increasingly, Select Harvests is realising that almonds have huge application in plant-based foods: its almonds are used in flour, milk and edible oils. Its almond paste is one of the main inputs in making almond milk and butter. The value-added side of Select Harvests’ business has plenty of interesting opportunities.
The farming outlook is positive, with a 2024 crop rebound expected, and market demand and pricing moving to more attractive levels. The company says a good 2024 crop will quickly generate cash. The year-to-September 2023 result will be a loss, but analysts expect a return to profit in FY24. In the meantime, the shares are good value, for one of Australia’s premier agribusinesses.
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