1H18 result – slightly below expectations
Capilano Honey's (CZZ) interim result was slightly softer than expected. The company reported underlying NPAT of A$4.2m (+10.1%) and underlying EBIT of A$6.2m (+9.4%), which was just below our forecast. Despite this, improved honey supply and increased sales of higher margin products supported earnings growth. Total export sales were up only 1.4% as the company continued to reduce its proportion of low margin industrial bulk honey sales. While retail export sales rose approximately 5%, the rate of growth was below our expectations. CZZ maintained its high domestic market share, with retail sales increasing 7%.
The EBIT margin increased to 8.8% (from 8.5% in the previous corresponding period) which management attributed to manufacturing efficiencies and the benefit of greater higher-margin sales. This was a credible outcome given CZZ experienced a competitive pricing environment and incurred increased salaries and wages, as new staff were hired in export, marketing and NPD roles. CZZ said its marketing efforts for Beeotic were hampered during the half due to the impact of domestic regulatory reviews (resolution to be confirmed shortly).
We revise our forecasts
As expected, no specific FY18 earnings guidance was provided. However management said that this year's natural honey crop will be the largest in over a decade. With increased supply, CZZ is focused on increasing exports, particularly to China. CZZ highlighted that its newly appointed marketing executive team have a wide breadth of experience in marketing health focused products in China and cross border e-commerce.
The company is well advanced in bringing new products to market. Due to a poor manuka season and increased costs associated with its export and new product development strategy, we have reduced our NPAT forecasts by 6.4% in FY18, 6.1% in FY19 and 3.9% in FY20. We expect CZZ will deliver stronger earnings growth in FY19/20 as it executes its export strategy and benefits from further new product development. The beekeeping joint ventures should also deliver a more acceptable return.
With an entrenched market position in Australia, further earnings growth will be more dependent on CZZ's success in export markets, particularly in China. It will also be dependent on new product development. Given CZZ's brands are not as well known in China, gaining traction will require additional resources and will take time.
With patience required, and less than 10% upside to our share price target, we move our recommendation from Add to Hold.
Morgans clients can login to view our detailed report and share price target for Capilano Honey (CZZ). Alternatively, please contact your Morgans adviser or 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.