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Is Capilano Honey Limited still a sweet investment?

The first of my shareholdings to report earnings was Capilano Honey Limited (ASX: CZZ), and I’m happy to tell you that the results were broadly positive (and the share price is up a modest 13% since my last article on the company).

More importantly: Is Capilano still good value today? Well, let’s have a look at some basic metrics first:

Market Capitalisation: $60 million.
Share Price: $7.03.
Dividend: 35c (including 5c special dividend), fully franked. A trailing dividend yield of just under 5%, fully franked.
2014 FY Profit: $4.6 million. A P/E ratio of about 13.
2014 FY Operating Cashflow: $11.8 million, although this isn’t representative of a normal year.
Debt: Just under $8.7 million.
Cash: $1.1 million (prior to paying dividend of $1.7 million).
Inventory: $13.7 million.
Real Estate: Recently valued at just under $6 million.

The most important thing for investors to note is that the cashflow isn’t really representative of a normal year, for a number of reasons. First of all, the company paid less tax because of deferred tax assets that are now replaced by a liability. On top of that, the insurance payout for a fire exceeded the cost of replacing the equipment. Most of all, the company really dug into its honey reserves (to the tune of almost $4.7 million) because the honey yield in Australia was so low this year.

And therein lies the fascinating part of the Capilano Honey investment. Honey yields are falling dramatically for a number of reasons – with the most likely culprit being pesticides. For example, Nufarm Limited (ASX: NUF) sells pesticides that the company itself warns should not be applied “pre-bloom or during bloom or when bees are foraging.” Of course, it’s hard to know whether farmers follow these instructions.

Honey bee colony collapse is such a problem in the USA that the country has become the major export destination for Capilano. Americans have little chance of satisfying their own demand for honey. Indeed, I described last year how investors could profit from America’s poor stewardship of its bee population by investing in almond producer Select Harvests Limited (ASX: SHV), because almonds require bees for pollination. It’s no surprise American almonds are becoming more costly to produce.

But I diverge. Another big problem for Australian honey bees is extreme weather, which scientists tell us is likely to continue due to the greenhouse effect. To quote the Capilano annual report: “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…” Capilano does import honey from New Zealand and (I believe, but have not confirmed, Argentina), which it sells under its other brands. I’m told by a helpful friend who is a commercial customer of theirs that they are very upfront about where the honey is from.

Australian honey is amongst the best in the world. Regular readers will appreciate the fact that I flew all the way to Germany just to test out their honey, and I found that ours is, in fact, much better (although I may be biased). Chinese honey is plentiful but often suffers contamination issues. Furthermore, there is a major problem with fake honey. The ACCC recently fined the owners of the ‘Victoria Honey’ brand for selling a product that wasn’t even pure honey, let alone 100% pure and delicious Australian honey.

Capilano is already taking advantage of its strong brand and access to 100% pure Australian honey to put up prices. So far at least, there’s been no serious drop in volumes, and the company actually increased its market share slightly in FY 2014. While I am worried about the impact of a diminishing supply of honey, there can be no doubt that Capilano is a brand worth trusting – and that fact is not fully represented on the balance sheet.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Capilano Honey Limited. Disclosure is important, so good on you for reading this far.

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