All Research | EthicalEquities

Capilano Honey Ltd (ASX:CZZ) Takeover: Annual Results

Claude Walker — Mon, 13 Aug 2018 00:00:42 +0000

Honey producer and distributor, Capilano Honey (ASX:CZZ) today announced its annual results for the 2018 financial year, as well as a takeover offer priced at $20.04 per share.

Total sales were up around 3.5% to $138 million and profit was up over 15% to $9.8 million on last year's weak result (assuming you exclude a capital gain). However, profit was flat on the 2016 result, indicating a weak growth trend at best. As you can see below, the company has not been successful at growing exports in recent years.

In keeping with recent performance, inventories increased and cashflow was weak, with the company achieving breakeven for the year on a free cashflow level. Thus, while these results were acceptable, they were not particularly positive.

Takeover offer

The interesting news today is that there is a takeover offer at $20.06, as you can see in the announcement below:

This looks like a reasonably good deal for shareholders, since it realises the strategic value of the assets. If the new buyer can accelerate sales to China as planned, they should get the better end of the bargain, but perhaps rightly so. With shares set to open at about $19.50, there may be a small arbitrage opportunity, but that's not something I would bother with. Overall this is a satisfactory end to an Ethical Equities story that started with this post:

Will Capilano Be A Sweet Investment?

I think we can answer in the affirmative.

The Author of this piece, Claude Walker, does not own shares in Capilano. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

Capilano Honey Limited (ASX:CZZ) Notes on the 2014 Annual Report

Claude Walker — Thu, 31 Jul 2014 10:50:02 +0000

Hi guys,

I'm overseas at the moment and taking time out of my holiday to blog for you. So here's my notes on Capilano's FY 2014 Annual Report in shorthand. Some of these bullet points are quotes from the annual report, others are my thoughts. In no particular order...

They own $5.99 million worth of freehold land though this may be inflated.

Quite high salaries, only short term incentive, goalposts not set out in annual report. Overall, employee expenses significantly more than profit at $8.3 million.

79% of sales by $ are to domestic market (steady last 2 years)

There is of course major customer risk (top 10 suppliers = 66%)

Why do we owe beekeepers $2 million (note 26 annual report)? Prompt payment would keep them happy and builds trust.

Capilano’s Brand market share was 49.4% (MAT to 29 June 2014), up from 47.7% the prior year. This does not include the market share of our other Brands on the market such as Wescobee, Allowrie, Barnes, BeeVital and Smiths.

Biggest foreign customer by far is USA

Consumption of honey by consumers has remained steady at 10,009 tonnes, despite increases in price.

Domestic sales increased by over 19%, export sales by over 22%, strong growth in "Health and Wellness" honey, namely super expensive honey. Sales to Asia more than doubled.

There is equity in the Brand ‘Australia’ as a consequence of the nation’s competency in producing quality agricultural products in unpolluted and native environments, with accompanying high standards of food manufacture.

Food safety quality systems and factory operations in both our packing plants in Queensland and WA have been upgraded and were recently independently audited and awarded the prestigious ‘A rating’ under the BRC quality assurance system.

Honey supply was adversely affected by a continued lack of rain, untimely weather events during key production times and extreme heat-wave conditions that affected honey bee colony health and vitality. The adequate supply of honey remains an on-going issue; however we have increased our supplier base as we endeavour to improve supply and to be the beekeepers’ number one choice when selling.

In June 2014 we launched Barnes Naturals, a dedicated health brand targeting the health food and pharmacy sector.

This year we have made considerable changes to better our sales mix by reducing lower margin large retail pack sales and increasing sales of core ‘family focused’ retail lines. New premium products have also been launched including pot set honey, seasonal selection glass jars and higher grade honeys. The culmination of the sales mix change has seen a 30% increase in $ per kg for product sold on shelf through supermarkets (QTR to 29 June 2014).

A key pillar of our growth strategy is to be unrelenting in our pursuit of Australian honey supply, new beekeepers and better access to resources for our contracted loyal beekeeper suppliers. Our relationship with the beekeepers who supply us remains a significant priority.

Our product is aligned with compelling consumer trends to eat natural unprocessed foods and we see a great future as we educate consumers further on the benefits of honey and its organic provenance. We will preserve our focus on quality and service and will look to deliver new innovations to our range.

2 beekeepers on a 5 member board

Operating Cashflow ridiculously strong at $11.8 million, but this isn't representative of normalised free cashflow for a number of reasons, including the insurance payout.

Insurance proceeds were $1.2 million more than expenses resulting from fire.

Tax benefit of almost $1.1 million used up

New $900,000 tax liability

Honey inventories down by $4.7 million

Payables down by $1.8 million and receivables down by about $0.3 million: difference = $1.5 million

So overall a more representative cashflow figure would be $6.5 million

PPE cost over $2 million (about $1.2 million of that was not fire related)

Yearly regular capex at least $1.2 million, so FCF is closer to $5 million (rough estimate)

Raw material costs up, sales revenue up, employee costs up, factory costs up

Loans repaid by about $7.5 million, almost halving the debt

Company outdid my expectations by a whopping 25%.

Will continue to hold despite the fact its no longer such awesome value (Share price up 27% since buy price).

My personal buy price moved to about $6.50 (ballpark - subject to revision).

I still hold concerns about the effect El Nino will have on honey production in Australia, or the buy price would be noticeably higher.

The author owns shares in Capilano Honey Limited. Nothing on this blog is advice, ever, and may even be plain wrong. The purpose of this blog is to document my thoughts on different companies in an easily accessible way and to make connections with likeminded investors. Subscribers to the Free Newsletter get sent research first, and have access to the Hidden Research.
Follow @claudedwalker

Will Capilano Honey be a sweet investment?

Claude Walker — Wed, 25 Jun 2014 11:17:34 +0000

I first started thinking about bee populations as a result of Select Harvests Limited (ASX: SHV) because bees are required for the pollination of almond trees.

That process (some time ago now) lead me to Capilano Honey Limited (ASX: CZZ) which divides analysts and commentators into two camps. Those who avoid the puns, and those who spread them.

Edit: Before I get back into the puns, the key questions on my mind are:

1. do higher shop shelf prices for Australian honey mean better margins and therefore higher profits despite declining volumes?

2. Will the Australian honey buying consumer bear paying $10 - $15 for 500g of honey?

The truth of the matter is that I don't have access to my computer so I can't look at my valuations right now, but from memory I got a buy price for Capilano of about $5.40 - $6.00 depending on my inputs. I've recently bought shares at $5.70 because the company announced a dividend of 20c. However, the company is ex div tomorrow so by rights it should drop 20c in price although we will see about that.

The main point of this post is to address the concept that the apiarists make up 35% of the shareholders and this apparently is a problem. People say it is a problem because the company might have an attitude of paying the beekeepers too much. However, because the main constraint on the business is honey supply, I personally think it would be a terrible idea to squeeze apiarists.

Apparently there is a buzz about the stock, because $10 million worth of shares crossed today at $5.75.

Back to the sticky subject of the apiarist shareholders - they are already selling down. Having seen their shares double or more, it is only natural that they may take some profits. However, they cannot control the company with just 35% of the vote, so I am not too worried about that. In any event, shareholder apiarists would oppose overpaying for honey because it would benefit non-shareholder apiarists at their expense. I am happy to part own their company. They built it and are essential to its success.

That's because honey production is declining everywhere for a number of reasons, pesticides being the main one: they are, after all, designed to kill. In the USA, they have experienced colony collapse because they mistreat their bees and have horrible agricultural practices, but don't get me started. Chinese honey is abundant but unacceptable to people who are sane and understand the risk it will be tainted with antibiotics (used to keep the abused bees healthy) and heavy metals.

Bottom line is you need to love bees to produce good honey, or at least love something about it. It is extremely complicated and physically demanding. It also requires patience. Australian (and NZ) apiarists make some of the best stuff.

Edit: It's also worth noting that we do not have enough Australian honey. Capilano sells cheap (possibly) Chinese or (more likely) Argentinian honey through its Allowrie brand. It has historically imported from Argentina, but the packet just says "imported". I don't like that they do this but there is little choice, especially given some Australians are unwilling to pay for decent produce at the supermarket. This is ridiculous given they will happily buy McMansions, multiple new flat-screens, and gas guzzling SUVs. In any event, there is a serious lack of pure Australian honey, because bees are so delicate - so you either pay up, or eat the inferior imported stuff.

Bees need a clean environment, plenty of flowers and it has to be warm enough to make lots of honey (above 18 celsius) but not too hot either (you don't want it to get above 36 degrees or the little bees become distressed). This is, obviously, the main risk for Australia because summers are getting hotter and hotter. Last year, hives were collapsing because the wax was melting. It is very important that hives are located in a cool spot. There are also a litany of other threats to hives.

El Nino (70% probability) brings on drought and hot weather, which means that Eucalypts don't flower as much. That means that if we go into El Nino, the chances of a honey production rebound are very low. Therefore, if and when El Nino is confirmed, I may look to reduce my Capilano holding.

I didn't go long almonds, nor sandalwood, nor salmon, nor graphite. I went long honey. I wonder how that will turn out.

Update: I was overweight CZZ due to a fit of excitement. I've since reduced to a normal position size (at a profit) due (in part) to the steady accumulation of evidence that El Nino is coming. Still holding.

The author owns shares in Capilano Honey. Nothing on this blog is advice, ever, and may even be plain wrong. The purpose of this blog is to document my thoughts on different companies in an easily accessible way and to make connections with likeminded investors. Edit: Subscribers to the Free Newsletter were sent this post in a monthly newsletter as soon as it was published. Since then Capilano Honey is up over 18% in just over a month.

Follow @claudedwalker