FY17 result – a year of investment
Capilano Honey's (CZZ) reported result was largely in line with our expectations, however the underlying result was below do to lower than expected revenue growth. While domestic sales increased by 6.1%, export sales fell 18.6% as CZZ reduced its exposure to low margin industrial bulk sales. Importantly its gross profit margin rose to 42.3% from 41.4%.
FY17 underlying EBITDA fell 6.1% on the previous corresponding period to A$15.0m and reflected increased investment in the business. CZZ invested in new product development (Beeotic), increased marketing activity (A$2.2m attributed to new products) and strengthened the management team. Reported NPAT increased 9% to A$10.3m (vs Morgans A$10.5m) and benefited from lower D&A, net interest and tax. Reported NPAT included a net gain from one-off items of about A$0.74m (A$2.07m gain from the sale of manuka beekeeping assets less an unfavourable raw honey stock revaluation of A$1.33m).
The beekeeping operations were impacted by unfavourable seasonal conditions, resulting in both beekeeping Joint Ventures (JVs) reporting small losses. In a more normal year, we think CZZ should earn at least A$0.5m of equity accounted profit from these JVs. The highlight of the result was improved operating cashflow (despite building increased stock levels for future growth) and a stronger than expected balance sheet. Net debt decreased from A$9.6m to A$7.8m and Net Debt/Equity fell from 17.3% to 12.5%. This strong balance sheet will allow CZZ to pursue future growth opportunities.
Well positioned to benefit from a year of investment
As expected, no specific FY18 earnings guidance was provided. We have lowered our NPAT forecasts by 7.8% in FY18, 7.7% in FY19 and 7.5% in FY20 to reflect additional costs associated with new product development. Despite these changes, we still forecast solid earnings growth of 10.9% in FY18. We expect top line growth will be driven by consumers' increasing demand for honey, continued domestic market share gains, mix benefits from selling higher margin honey products (Beeotic, Manuka and Jarrah), rising exports and improved seasonal conditions (greater honey supply and earnings from the JVs).
Our positive investment view on Capilano Honey (CZZ) was not based on this FY17 result, which we recognised was a year of consolidation after years of solid earnings growth. Importantly, management appears to have a clear strategy in place to resume its growth trajectory.
CZZ is trading at a material discount to its peers and we believe its valuation remains undemanding for a market leader in a high margin, growth company.
We retain our Add recommendation.
Morgans clients can login to view our detailed report and share price target for Capilano Honey (CZZ). Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.