If you buy honey, play a game with me – go find the jar and look at the branding – It’s okay, I’ll wait.
If it was one of Allowrie, Wescobee, Barnes Naturals or Capilano then you buy Capilano Honey! Capliano have held somewhere between 45-52% of the Aussie market over the past decade.
Capilano Honey Ltd (CZZ.AX) is an Australian company engaged in packaging and small-scale production of honey for domestic and export sales. Recently the company committed to 50% stakes in two beekeeping joint ventures focusing on increasing Manuka Honey and Organic Honey supplies to their domestic and export markets. Capilano sell honey products into Australia, Europe, North America, Middle East, Asia and the Indian sub-continent and the Pacific Islands. Capilano also sells Apple Cider Vinegar (which is pretty tasty on salads).
The company was founded in 1953 by two brothers, one of whom had been stationed in the Capilano district near Vancouver with the Royal Australian Air Force as a flying instructor during WWII. He met his wife whilst there, and so the story goes, named the company after the district in which met. Capilano listed on the Bendigo Stock Exchange in 2004 and subsequently on the ASX in 2012 and has grown profits and revenues nicely since then.
I calculated the 5 year average for Return on Equity and 5-year average growth rate for Revenue, NPAT and dividends using data from the 2011-2017 annual reports.
Return on Equity: 18.1% p.a. (annualised figures use geometric mean)
Revenue growth rate: 9.4% p.a.
NPAT growth rate: 19.1% p.a.
Dividend growth rate: 27.8% p.a.
Current Payout Ratio: 36.73%
Earnings per share have increased from 40.45 cents to 108.9 cents since 2013. Dividends over the period have grown from 15 cents to 40 cents, fully franked. This represents a payout ratio of less than 37%. I’ve got to admit, these figures are pretty sweet.
Under the hood
Domestic sales have been growing at CAGR of 4.9% p.a.. over the past 3 years and were up over 6% for 2017.
Exact numbers for 2017 export sales aren’t available but Capilano noted export sales were down slightly for the year due to increased competition and lower pricing. In 2016, export sales made up approx. 21% of total revenues for the company (up from ~18% in 2015) and sales to China, which are growing at around 39% p.a. are at 3% of total revenues.
Similarly, profits have grown substantially from 2012. Net profit margins have doubled over the period from 3.72% to 7.77%. The company has little debt, with a net gearing level of 12.51%.
A Case for Growth
The honey market in Australia is fairly mature – in both my base case and growth case estimates, I can only assume that Capilano will continue to grow domestic sales of honey at around 4-5% p.a. for the next decade.
Any bonus in domestic earnings will likely come from the newly launched Beeotic product, a prebiotic food which was clinically tested and has been put on the Australian Register of Therapeutic Goods. Capilano claims Beeotic may benefit digestive health and improve overall health and immunity at doses of 14ml per day.
Capilano holds 15% of the grocery market share in sales of premium Manuka honey, making it the market leader.
In their most recent half year results, Capilano noted sales from their non-honey products are growing rapidly and could be a meaningful contributor going forward. Non-honey product sales made up $8.73 mln or 6.6% of sales in FY2017, sales to the half year ending Dec 31st 2017 totaled $5.05 mln.
The export market is what drives most of the value in the growth case. In 2016, the Global market for honey was estimated to be worth $2.2 bln USD. Australia is a very small player in the international market ($31 mln or 1.6% in 2016), which is dominated by China (14%), New Zealand (11%) and Argentina (8.4%).
Australian honey is seen as some of the best in the world, despite our small export value. This is largely due to our isolation from pests, diseases and from the flower varieties bees collect pollen from (e.g. Manuka and Jarrah).
Exports of premium Manuka honey – which sells for up to $120 to $150 per kilo – should help Capilano grow revenues in this segment. The company reported that premium exports have become a key growth focus, growing overall sales to China by 39% in FY17. In China, Manuka honey is a real buzz and can apparently retail for up to $250 per kilo.
Capilano estimates its market share of Manuka sales are around 11%.
International trade tarrifs have been reducing steadily since 2004 when they averaged 26%. In January 2017, they dropped to 6%. This has provided a small tail wind for Australian honey exporters like Capilano.
Some key risks for Capilano include:
- Poor management of capital (I estimate this has a fairly low probability at present – based on past management performance)
- Increased competition from domestic and international producers / suppliers
- Poor performance in overseas markets and currency fluctuations
- A loss of market share (unlikely locally, in my view)
- Climate change leading to unreliable honey production in Australia and a loss of quality flora leading to lower quality product, then lost reputation.
- Exotic pest and disease, especially the varroa mite. Biosecurity and quarantine/inspection services serve the Australian honeybee industry well, according to official reports.
- Loss of access to quality flora from other means
- Quality perception of the brand changing in the public eye (e.g. if GM is introduced, or via contamination)
A combination of these would be enough to put a bee in my bonnet, but in isolation none of them would be fatal.
Why I bought Capilano Honey Ltd.
Steady above-inflation-paced growth domestically and a fair probability for solid growth internationally attract me to Capilano. Even in tight economic conditions, consumers are not likely to curb small pleasures of which honey is one. It’s a segment in which customers are quite brand loyal.
The company has a sound balance sheet with growing earnings and dividends. Even better, the payout ratio is fairly low so the dividend is likely to grow over time. My base case scenario suggests it has recently been slightly undervalued and my growth case scenario that it is attractively undervalued. I’m still learning DCF so I don’t put much weight on my valuations.
I bought 120 shares of Capilano at an average price of $17.21.
Full disclosure: Long Capilano Honey Ltd.
As always, do your own research. This post is for entertainment purposes only and is not intended to be advice nor should it be read as financial advice. I am not a professional stock analyst or financial advisor. Also, terribly sorry for all the puns. Couldn’t bee bothered controlling myself.