Select Harvests is growing profits

Since September, Warrnambool Cheese and Butter Factory Company (ASX: WCB) has been under three competing takeover offers, and still it is no clearer as to which suitor will eventually come out on top. The food products industry was back in the news with the Federal government’s rejection of the Graincorp takeover by US Archer Daniels Midland (NYSE: ADM) due to concerns of foreign ownership of grain shipping and exporting infrastructure.

Investors should keep an eye on Australian companies that are performing well — in the search for quality food sources by international companies and investors, they can attract a premium on their share price and still keep on generating good earnings.

Select Harvests (ASX: SHV), producer of almonds, nuts and other natural health foods under such brands as Lucky, Sunsol, Nuvit and Soland, announced at its AGM that it would be exiting its Western Australia greenfield development after write-downs occurred in 2013.

Its Victorian almond orchards will be a part of its ongoing growth strategy, and its new acquisition in South Australia’s Riverland region of 983 hectares of land and orchards will increase its geographical diversity of production. The $12 million purchase also includes the 2014 crop rights, with an estimated yield of 800-900 tonnes. Another 50% of the land acquired can still be developed for growing. In 2013, it was able to sell its almond crop at $6.60/kg, about 30% more than the $5.08/kg price in 2012.

Its food division had mixed results, with lower profit margins in its consumer packaged business and strong growth in its industrial business that supplies food manufacturers. The weakness in private labels brands was more than offset by the expansion of almond prices.

The company is seeing demand from developing markets such as India, China and Eastern Europe rising in recent years, but this past year demand had shifted back towards developed economies like US, Western Europe and Australia due to the growing interest in health foods like muesli, health bars and healthier baking products.

The company recovered from a $4.47 million net loss before abnormals in 2012 to achieve a $23.4 million net profit before abnormals in 2013. Over the past year, its share price has rallied from $1.40 to its current $4.74, or up 238%.

Its net profit margin was 12.23%, a great improvement over the previous years, and returned to the margin levels it had before 2008. Return on equity came in at 14.6%.

Foolish takeaway

Investors can also look at Webster (ASX: WBA), a producer of walnuts in Tasmania and New South Wales, as well as onions for the Northern Hemisphere market, to get a feel of similar food production, and see how the two perform.

They may be different products, but knowledge of both will help you understand the key drivers and various challenges of markets in which they operate in.  Knowing the industry is just as important as knowing the individual companies.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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