In a recent article, I highlighted fruit and vegetable supplier Costa Group Holdings Ltd (ASX: CGC) as a potential buy thanks to its market-leading position in a growing industry. Here is another food stock that I think is a buy today as well as two to steer clear of. Capilano Honey Ltd (ASX: CZZ) is the number one retail supplier for honey in Australia and sells its products through a variety of brands including its namesake as well as Wescobee, Bee Vital, Allowrie and Barnes Naturals. Capilano has developed relationships with a large network of beekeepers over many…
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In a recent article, I highlighted fruit and vegetable supplier Costa Group Holdings Ltd (ASX: CGC) as a potential buy thanks to its market-leading position in a growing industry. Here is another food stock that I think is a buy today as well as two to steer clear of.
Capilano Honey Ltd (ASX: CZZ) is the number one retail supplier for honey in Australia and sells its products through a variety of brands including its namesake as well as Wescobee, Bee Vital, Allowrie and Barnes Naturals.
Capilano has developed relationships with a large network of beekeepers over many years and is the top consumer honey brand in Australia and so it would be very difficult for competitors to challenge its dominance. The company has benefited from rising prices in recent years and this trend shows no signs of reversing given the growing popularity of health foods and restricted Australian honey supply.
For the first half of 2016, company revenue grew 15% to $67.1 million with net profit before tax (NPBT) rising 52% to $7.77 million. The result was driven by export sales which rose by 32% with Asian sales particularly strong, up 53%.
Export sales are still in their infancy and Capilano is focused on increasing production of lucrative premium varieties such as Manuka honey that are highly sought after in Asian markets. To this end the company announced a partnership with New Zealand-based Comvita in March to form an apiary business with the goal of increasing the supply of Manuka honey.
Capilano looks reasonable value at today’s prices given it has a market capitalisation of $201.4 million and is on track to deliver NPBT of more than $15 million for the year.
On the other hand, large-scale cattle farmer Australian Agriculture Company Ltd (ASX: AAC) is one to avoid. Whilst the company’s strategy to position itself as the largest Australian supplier of premium Wagyu is a valiant attempt to differentiate its product offering, I feel it is unlikely to be successful.
Demand for premium beef such as Wagyu is on the rise globally but the trouble for Australian Agriculture is that Wagyu cattle can be reared in many parts of the world. Whilst honey is also produced globally, the Manuka tree is native only to New Zealand and South East Australia – highlighting the superiority of Capilano’s business.
Although Australian Agriculture Co. achieved an impressive 45% increase in revenue to $489.4 million in 2016, operating earnings before interest, tax, depreciation and amortisation (EBITDA) were just $14.8 million for the period. Given net debt was $354.7 million at the end of March 2016 and cattle farming requires significant ongoing capital expenditure it is likely that underlying earnings were negative for the year.
With a market capitalisation of $1.1 billion, (potentially) negative earnings, a largely commoditised product offering and high debt levels I won’t be buying shares in Australian Agriculture anytime soon.
Cheese manufacturer Bega Cheese Ltd (ASX: BGA) is another company of questionable quality. Like Australian Agriculture Co. it suffers from weak margins, indicating that customers are unprepared to pay up for its products. Whilst Capilano generated gross margins of 42% in 2015, Bega managed a paltry 12.1% over the same period.
In February, the company announced that Coles had elected to change suppliers for its “own brand” cheese, a contract held by Bega since 2012. The market release painted the news in a positive light indicating that the company would be able to redirect the milk supply to other higher value products and free up $60 million of working capital.
That may well be the case but the thing that concerns me most about Bega is its apparent inability to generate cash. Although a relatively mature business, the company has delivered total free cash outflows, defined as operating cash flows less payments for property plant and equipment, of $32.2 million in the past 2-1/2 years. Despite this, Bega has a market capitalisation of $874.4 million.
You may not own either of the above two stocks but that's not to say there aren't other subpar companies lurking in your portfolio. Check if you hold any of these three poor quality businesses and if you do, you might want to substitute them with this top stock that is likely to thump the market's returns.
After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.
Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.