California drought buoys Select Harvest investors with renewed hope

Wed 23 Mar 22, 5:22pm (AEST)

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Key Points

  • Select Harvests stock is down -18% YTD on logistical problems, lower almond prices
  • Revaluation is expected if prices for the water-intensive nut improve
  • California, which produces 80% of global supply, is experiencing drought

In a development that could impact Australia’s almond industry, California, where about 80% of the global supply of the water-intensive nut crop is grown, is on track to see its driest ever start to the year.

The state recorded its driest January and February on record, and March is set to be similarly rainless, prompting calls by some commentators for authorities to impose strict water use mandates on urban and agricultural consumers.

If confirmed, a Californian drought would be good news for Australian producers like Select Harvests Ltd (ASX: SHV), whose shares slid -18% YTD on logistical problems and a persistently low almond price driven by record American output.

The company’s stock rallied in August and September last year, amid predictions the US drought would hit almond production.

But it has since given back all those gains, after heavy rainfall in late 2021 [in California] dashed those Australian hopes. This year’s American harvest is expected to be only slightly less than last year’s bumper 3.2bn pound crop.

Select Harvest also funded most of its $138.3m acquisition of the Piangil Orchard by issuing new stock, which also pressured the stock price.

Select Harvests financials down on almond prices

The company posted slightly lower financial results in FY21.

Higher nut volumes drove revenue up 22% compared with FY20, but earnings (EBITDA) fell 15% on the prior period, to $53.7m, on lower realised almond prices.

Select Harvest produced 28,250 t of almonds in FY21, up 21% from the prior year, at an average cost of $5.63/KG - broadly in line with the prior year.

Its realised almond sales price in the period fell to $6.80/KG, from $7.50/KG in the prior period, and EBIT margin fell to just 14%.

Chairman Paul Thompson said the financial result showed the company could remain profitable even at the lowest point in the almond price cycle.

Water prices surge

The biggest factor on future price is output in California.

A drought would impact almond yields, as would government-imposed water restrictions.

Water, which accounts for a significant share of costs for American orchards, is also becoming more expensive.

The price benchmark of the private water market in California, the Nasdaq Veles California Water Index, was at US$793 per foot acre on Tuesday - down slightly from its peak last year, but much higher than the US$215 per foot acre seen in early March 2020.


The Select Harvest share price has been losing ground over the last six months.

What brokers think

Two major brokers cover the company - Citi and UBS - and both have strong buy recommendations, with a consensus target price of $8.80, which represents 73.9% upside to the current price.

UBS does not expect the low current almond prices to last, while Citi noted that management expects almond prices to return to 10-year average pricing of over $8 /KG in the medium term.

Consensus on Select Harvest is Strong buy.

Based on Morningstar's fair value of $8.24, the stock looks undervalued.

Written By

Ben Seeder


Ben is a freelance contributing editor based in Tasmania. He has a Bachelor's Degree in Journalism and Government from the University of Queensland, and is a small-cap stock-picker.

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